-- U.S.-based diversified health care company Endo Health Solutions Inc.
has paid down more than $600 million of debt since it acquired American
Medical Systems Inc. in June 2011.
-- We are affirming our 'BB' corporate credit rating on Endo. We are also
raising our issue-level rating on the company's senior unsecured notes to 'BB'
from 'BB-' and upwardly revising our recovery rating on that debt to '4' from
-- Our stable rating outlook reflects our belief that, over the next 12
months, Endo will use its free cash flow to reduce leverage to less than 3x in
anticipation of a potential decline in EBITDA.
On Nov. 6, 2012, Standard & Poor's Ratings Services affirmed its 'BB'
corporate credit rating on Chadds Ford, Penn.-based diversified health care
company Endo Health Solutions Inc. The outlook is stable.
At the same time, we raised our issue-level rating on the company's senior
unsecured notes to 'BB' (the same as the corporate credit rating) from 'BB-'.
We revised our recovery rating on this debt to '4', indicating average (30% to
50%) recovery for noteholders in the event of a payment default, from '5' (10%
to 30% recovery expectation).
Our issue-level rating and recovery rating on the company's senior secured
debt remain unchanged at 'BBB-' and '1', respectively.
We raised our issue-level and our recovery rating on Endo's unsecured notes
following the company's voluntary and mandatory secured term loan B payments
of more than $600 million since acquiring American Medical Systems (AMS) in
June 2011. The decrease in secured debt results in improved recovery prospects
for the holders of the company's $900 million senior unsecured notes due in
2019 and 2022.
The corporate credit rating on Endo reflects the company's "significant"
financial risk profile (according to our criteria), which incorporates
leverage of about 3.2x as of Sept. 30, 2012. Leverage has improved, from more
than 4x in the prior year period, because of mandatory and optional debt
repayments made over the past year. We believe Endo has only a "fair" business
risk profile, given franchise and product concentrations.
Endo is tracking to our expectation that it will generate low-double-digit
sales growth in 2012. Our expectation is primarily based on low-single-digit
growth of Lidoderm, low-double-digit growth in generics, and mid- to
high-single-digit growth in medical devices and technology. Full-year 2012
EBITDA and free cash flow will likely be less than we expected because of
one-time items and product shortfalls related to a contract manufacturer
shutdown in the first half of 2012. When adjusted for one-time items, EBITDA
and free cash flow should meet our expectation of $965 million and $585
million, respectively. In 2013, we expect total sales to decline about 3%
because of the generic launch of Lidoderm. Endo is heavily reliant on
Lidoderm, and growth in other products or business segments will not offset
We expect EBITDA to decline by at least 15% in 2013. The decline in EBITDA is
higher than revenues because of the loss of higher margin Lidoderm and also
because the full effect of cost reductions will not be realized until 2014.
Still, we believe Endo will generate more than $450 million of free cash flow
in 2013, which Endo will use for debt reduction and share repurchases.
Therefore, we believe leverage should decline to about 3x over the next 12
months. In 2014, we estimate Lidoderm revenues could decline by about 40%,
based on historical data of branded product sales declines following generic
launches. However, in that year, we also expect total sales to decline in the
low single digits because of continued growth in other branded products as
well as the generics and devices and services segments.
Endo's significant financial risk profile reflects leverage of about 3.2x as
of Sept. 30, 2012. Although we expect EBITDA contraction in 2013, our belief
that Endo will continue to reduce debt over the next year gives us a high
degree of confidence that leverage will not exceed 4x following the launch of
generic Lidoderm. The financial risk profile also reflects a shift toward a
more aggressive financial policy following the higher leverage incurred for
the $2.9 billion acquisition of AMS, which followed closely after the
company's $1.2 billion purchase of Qualitest Pharmaceuticals in November 2010.
We believe Endo could complete other acquisitions as an offset to
greater-than-expected sales decline of Lidoderm after Watson's launch of
generic Lidoderm in September 2013.
In the nine months ended Sept. 30, 2012, about 48% of Endo's revenues were
from branded pain medications and about 30% of total revenues were from
Lidoderm. Endo's fair business risk profile reflects product and therapeutic
sales concentration that continues to persist, despite acquisitions made over
the past two years to provide diversity. It also reflects our belief that this
concentration will decline as the generics and medical devices businesses grow
and after Lidoderm goes generic in 2013. Moreover, the addition of generics
and medical devices businesses enhances product and geographic diversity and,
over the longer term, reduces Endo's dependence on patented pharmaceutical
Endo has "strong" liquidity, as defined by our criteria. We expect sources of
liquidity to exceed uses by more than 1.5x, or by at least $1 billion, over
the next 12 to 24 months. Our assessment of Endo's liquidity profile
incorporates the following expectations and assumptions:
-- Sources of liquidity include funds from operations of about $600
million expected in 2012, full availability of its $500 million revolving
credit facility, and surplus cash of at least $250 million.
-- Uses of cash include modest working capital outflows, capital
expenditures of $75 million to $100 million annually, and yearly share
repurchases of about $150 million.
-- Endo has no near-term debt maturities; the earliest debt maturity is
for the convertible notes, due 2015.
-- We believe Endo can absorb, without refinancing, a high-impact,
For the complete recovery analysis, see the recovery report on Endo Health
Solutions, to be published subsequently on RatingsDirect.
Our stable rating outlook reflects our expectation that the company's
debt-to-EBITDA ratio will remain consistent with our guidelines (3x to 4x) for
a significant financial risk profile, even though EBITDA will likely decline
after Watson Pharmaceuticals launches its generic version of Lidoderm on Sept.
15, 2013. We expect Endo to reduce costs and use free cash flow to reduce debt
in advance of the generic launch. This should establish some capacity to
absorb lower EBITDA at the current rating level. Despite the potential for an
EBITDA contraction in 2013 and 2014, we have a high degree of confidence that
Endo's leverage will not exceed 4x over that period.
In the next 18 to 24 months, we could lower the rating if, following the
commercialization of generic Lidoderm by Watson, sales and EBITDA decline more
than we expect and Endo maintains leverage at more than 4x, indicative of an
aggressive financial risk profile. This could occur if Endo does not reduce
its selling, general, and administrative (SGA) expenses as we expect,
resulting in lower EBITDA; if it chooses to use free cash flow for
acquisitions instead of debt reduction; or if there is no significant growth
in its other products. An upgrade is unlikely over the next one to two years,
given the uncertainty surrounding a decline in Endo's market share of Lidoderm
following Watson's launch.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Endo Health Solutions Inc.
Corporate Credit Rating BB/Stable/--
Senior Secured BBB-
Recovery rating 1
Senior Unsecured BB BB-
Recovery Rating 4 5