S&P Assigns 'B' Rating to AMAG Pharma (AMAG)

Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to AMAG Pharmaceutical Inc. (Nasdaq: AMAG. At the same time, we assigned a 'B+' issue-level rating to the company's proposed first-lien term loan B. The recovery rating on the term loan is '2', reflecting our expectations for substantial (70%-90%) recovery in the event of default.

"AMAG's acquisition of Lumara Health gives this small specialty pharmaceutical company a second major product which will provide revenue growth and EBITDA generation--a departure from its stand-alone operating history of losses," said credit analyst Michael Berrian. "Given the absence of a track record of profitable earnings, we think there is considerable risk to our base-case forecast, which calls for a very rapid expansion of EBITDA. Despite our expectation that debt to EBITDA will fall below 4x by 2015, we note that leverage will be closer to 5.5x at the close of the transaction, and view financial risk as a two year average, rather than relying on the 2015 projection."

The stable outlook reflects our expectation for that the Lumara acquisition will provide double-digit revenue growth and EBITDA generation of about $160 million in 2015, and that despite the potential for very rapid deleveraging, the company's debt to EBITDA will average about 4x over the next two years.

Downside scenario

We could lower the rating if our base-case revenue growth and EBITDA generation expectations are less than we expect. This would contribute to leverage being sustained at more than 5x. Such a scenario would occur if Feraheme and Makena grow less than we expect, likely because of lower-than-anticipated market share gains and/or patient compliance with Makena. Fiscal 2015 revenue growth of less than 30%, coupled with gross margins contracting by 800 to 900 basis points (which could occur with lower revenue growth) would contribute to this outcome.

Upside scenario

An upgrade is predicated on our confidence that the company can achieve our base-case scenario and sustain these operating results. Commensurate with this would be a track record of maintaining leverage within the 3x to 4x range.

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