TEXT-S&P rates Elan Corp's proposed notes 'BB-'
Overview -- Dublin, Ireland-based specialty pharmaceutical manufacturer Elan Corp. plans to spin off its drug discovery unit by year-end, subject to shareholder and bondholder approval. -- We are affirming our 'B+' corporate credit rating on Elan, and removing the rating from CreditWatch, where it was listed with positive implications on Aug. 13, 2012. -- We are assigning our 'BB-' issue-level and a '2' recovery rating to Elan's proposed senior notes due 2019, proceeds of which will refinance $625 million of existing unsecured debt. -- The stable rating outlook assumes Tysabri will continue to expand despite competition and that our expectations of stronger earnings and cash flow will be realized post spin. Rating Action On Sept. 25, 2012, Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on Dublin-based specialty pharmaceutical manufacturer Elan Corp plc, and removed the rating from CreditWatch, where it was listed with positive implications on Aug. 13, 2012. Our 'BB-' ratings on unsecured issues of subsidiaries Elan Finance Corp. and Elan Finance PLC were unaffected by the CreditWatch action. We are assigning our 'BB-' issue-level and a '2' recovery rating to Elan's proposed senior notes due 2019, proceeds of which will refinance $625 million of existing unsecured debt. The rating outlook is stable. Rationale The ratings on Elan Corp. plc reflect our belief that it will remain entirely dependent on its multiple sclerosis (MS) treatment, Tysabri, for the foreseeable future. This is highlighted by the proposed spin-off of Elan's discovery unit in the wake of the recent failure of an Alzheimer's treatment candidate. Consequently, we revised our assessment of the company's business risk profile to "vulnerable," from "weak." We now consider the financial risk profile to be "significant," rather than "aggressive," given the company's improved debt to EBITDA ratio as a result of asset sales and the approximately $20 million to $25 million of reduced interest expense as a result of this refinancing transaction. Should the spin-off of the drug development business (pending a shareholder vote and SEC 10-12b filing) be completed, we could raise the financial risk score to "intermediate" if our expectation for a significant increase in cash flow and earnings materializes, as research and infrastructure costs decline reflecting the narrower business focus. While the financial risk profile improves, upon completion of the discovery unit sale, we would not likely consider a ratings upgrade because of Elan's vulnerable business risk profile. We expect Elan's 2012 revenues from continuing operations to grow by about 15%, and adjusted EBITDA of $200 million to be about one-third higher than the reported $147 million of 2011(excludes all contribution from the EDT business sold in September 2011). We assume a similar revenue increase in 2013, as Tysabri continues to penetrate the MS market. Our forecast indicates that the sharp cutback in research spending will lead to a doubling of EBITDA in 2013, to over $400 million. While Tysabri's prospects could be significantly diminished by safety and competitive issues, its competitive profile has recently benefited from adverse events tied to Novartis AG's oral MS drug, Gilenya. In 2011, there was a 13% increase in the number of patients on Tysabri therapy. Alternatively, there are patients in the higher-risk progressive multifocal leukoencephalopathy population still being treated with Tysabri; they likely will discontinue use because of the risk. Several thousand higher-risk patients (out of a total of more than 64,000) discontinued Tysabri in 2011. Still, we believe market penetration will be the key driver in a 2012 revenue increase from Tysabri that could approximate 15%, predicated on the absence of currently unforeseen safety issues (e.g., those that led to injectable Tysabri's withdrawal shortly after it was initially introduced). Our similar double-digit revenue growth expectation for 2013 assumes new MS drugs are not of immediate significance. we do not expect Aubagio (Sanofi), just approved, and more efficacious threats from Biogen Idec and Teva Pharmaceuticals, potentially approved within a year, will meaningfully disrupt our base-case scenario for 2012 and 2013. The contraction in Elan's research supports our view that it will remain highly dependent on Tysabri. The recent clinical failure of its Alzheimer's disease treatment, bapineuzumab, was closely followed by the announced spinoff of its Neotope discovery unit, expected by year end. Elan is now a single product company, entirely reliant on Tysabri's performance. Although Tysabri does own market exclusivity thru 2020, alternative treatments are available for MS patients and additional products are under development as stated above. Considering these factors, we now view the business risk profile as vulnerable. Relative to Elan's debt, expected debt to EBITDA of below 3.0x by mid-2013 suggests an intermediate financial risk profile, because we believe Elan has the ability and intention to maintain debt leverage below the 3x maximum guideline for the category. The uncertainty surrounding the spinoff, expected 2012 leverage of nearly 3.5x,and historically thin discretionary cash flow preclude us from raising the financial risk profile to intermediate. Liquidity We consider Elan's liquidity to be adequate. Despite sources of cash that could significantly exceed mandatory uses over the next 12 to 24 months, we believe Elan might invest to broaden its portfolio and undertake shareholder-friendly financial transactions, thereby lowering cash balances. While increasing Tysabri profits and the potential monetization of Elan's remaining stake in Alkermes (with a current market value approximating $160 million) should bolster liquidity, we expect these funds to be allocated to value investments. Relevant aspects of Elan's liquidity profile are: -- Coverage of uses will be more than 1.5x over the next 12 to 24 months. -- Sources of liquidity likely will include funds from operations of close to $300 million in 2013, and cash balances exceeding $400 million following the spin. We expect uses of cash to include some investment in working capital and capital expenditures of under $50 million. -- Debt maturities and covenants are not a concern. -- However, given its product concentration, we do not believe Elan can absorb, without refinancing, a high-impact, low-probability event related to Tysabri. Recovery analysis Our issue-level rating on the senior unsecured notes issued by Elan Finance PLC and Elan Finance Corp. is 'BB-' (one notch above the corporate credit rating), with a recovery rating of '2', indicating our expectation for a substantial (70% to 90%) recovery in the event of payment default. (For the complete recovery analysis, please see the recovery report to be published following this report on RatingsDirect.) Outlook Our stable rating outlook on Elan Corp. plc reflects our expectation that despite high level of reliance on Tysabri, the drug will generate strong earnings, supporting an improving financial profile Elan's significant reliance of Tysabri limits the possibility of a higher rating, even if leverage declines further. We could lower the rating, however, if increased competition leads to sustained market share losses and margin contraction, resulting in EBITDA declining to approximately $150 million, and adjusted leverage exceeding 4.0x. Additionally, shareholder friendly actions that suggest that leverage will be sustained above 4x could also lead to a lower rating. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch Action To From Elan Corp. plc Corporate Credit Rating B+/Stable/-- B+/Watch Pos/-- New Rating Elan Finance Corp. Elan Finance plc Senior Unsecured US$500 mil sr unsecd nts due 2019 BB- Recovery Rating 2 Ratings Affirmed Elan Finance Corp. Elan Finance plc Senior Unsecured BB- Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.