Opioid litigation concerns weigh on pharmaceutical loan borrowers

NEW YORK: The opioid crisis came to the loan market last week, as the potential fallout from lawsuits weighed on manufacturers of the drugs cited as a root cause of the epidemic.

Pharmaceutical company Endo International's US$ 3.4 billion term loan was quoted at 97.75-98.5 on Monday, unchanged from Friday but down from 99.625-100.125 on March 4, as its stock fell 23% during the same five-day period. The drop followed a Reuters report that fellow drug producer Purdue Pharma, the maker of OxyContin, was exploring bankruptcy to address liabilities stemming from lawsuits tied to the opioid crisis.

The US$ 1.6 billion loan for competitor Mallinckrodt Pharmaceuticals, which plans to spin off its specialty generic drug business, was also lower, quoted at 95-96 Monday from 96-96.75 on March 4.

Pharmaceutical companies that produce opioids have been under pressure as the government cracks down on drugs they say are addicting and state attorneys general filed lawsuits against the manufacturers.

Endo was sued about the marketing of its Opana ER painkiller, which the US Food and Drug Administration (FDA) requested in 2017 be taken off the market. At the time, the FDA said it was the first instance in which it had taken steps to remove a currently marketed opioid pain medication from sale due to concerns about abuse.

"We are facing an opioid epidemic - a public health crisis, and we must take all necessary steps to reduce the scope of opioid misuse and abuse," FDA Commissioner Scott Gottlieb said in a 2017 news release announcing its request. "We will continue to take regulatory steps when we see situations where an opioid product's risks outweigh its benefits, not only for its intended patient population but also in regard to its potential for misuse and abuse."

Gottlieb this month announced his resignation.

It is too early to fully judge the impact litigation will have on these companies, according to Morris Borenstein, a vice president in the corporate finance group at Moody's Investors Service. But the opioid exposure is limited to a few pharmaceutical manufacturers, with Endo the most exposed because of the amount of lawsuits filed against it, he said.

LEVERAGE
Pharmaceutical companies have turned to the loan market in recent years to pile on debt at cheap rates to fund their businesses as well as to back acquisitions, leading to high rates of debt compared to earnings at a number of these borrowers.

Endo had leverage of about 6.3 times at the end of 2018 and Mallinckrodt had pro forma leverage of about 4.9 times as of September 30, according to Moody's data.

A spokesperson for Mallinckrodt declined to comment. An Endo spokesperson did not return a telephone call seeking comment.

"Endo has been weighed down by other litigation payments related to mesh, and a lot of cashflow has been utilized for that," Borenstein said. "They haven't had an opportunity or flexibility to repay debt. In 2019 they still have a fair amount of payments to make, and then after that, their cash-flow really opens up and they can work toward their goal to deleverage."

In 2017 Endo said it would make payments pertaining to mesh product liability claims between the last quarter of 2017 through the fourth quarter of 2019.

While the question about how the lawsuits could impact borrowers remains, the debt of Endo was still quoted higher than the overall loan market - a cohort of the 100 most widely held loans was quoted at 97.49 on March 8.

"There is some protection [for investors] in the event of default," said Ian Feng, an analyst at Covenant Review. "Every credit agreement has a judgment default; the size depends on the company."

If the company must pay a litigation finding that is higher than an amount specified in its credit agreement, typically calculated after accounting for litigation insurance, and the borrower does not pay within a set time frame, it would result in a default, he said.

"But if there is a judgment that large, the company is probably filing for bankruptcy so it will be a default anyway," Feng said.

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