Rating Action Overview

• Endo International PLC recently provided guidance for the second quarter of 2022 that was well below what we expected stemming from significant competition on Vasostrict that we assume will result in significantly lower free operating cash flow generation over the next couple of years.
• In our view, weaker cash flow prospects combined with the company's high debt levels and ongoing uncertainty regarding opioid litigation, increase the likelihood of a distressed exchange offer or below par redemption within the next 12 months.
• As a result, we lowered our long-term issuer credit rating on Endo to 'CCC' from 'CCC+'.
• At the same time, we lowered our issue-level rating to 'CCC' from 'B-' and we revised our recovery rating on Endo's first-lien term loan to '3' from '2'. We also lowered our rating on the second-lien term loan and unsecured notes to 'CC' from 'CCC-'.
• The negative outlook reflects the probability of a distressed exchange or below par redemption of its debt well within the next 12 months. The negative outlook also reflects our view that deteriorating cash flow generation over the next couple of years and potential liabilities associated with its opioid litigation, result in a current capital structure that is unsustainable.

Rating Action Rationale

Our downgrade of Endo reflects weakening credit metrics over the next 12 months resulting from increased competition and lower demand on the company's Vasostrict product.  Several alternative products to Vasostrict have launched since the beginning of the year, which is resulting in significant price erosion on the product. Additionally, declining overall volumes have a resulted in destocking of the product, which we expect will likely have a material impact in the second quarter and is likely to persist for a prolonged period. We now expect revenues generated from Vasostrict sales to decline more than 60% in 2022 from the previous year.

Additionally, the company expects continued investments to support pipeline products, which could pressure overall profitability in the near-to-medium term. As a result, we expect adjusted debt to EBITDA above 10x over the next few years and weaker prospects for free operating cash flow generation.

Our ratings also incorporate the possibility of significant litigation liabilities stemming from the company's past marketing of opioid products.  We have seen material settlements in certain states, including Florida, New York, and Texas, but many cases are ongoing. Despite the company's relatively large cash balance of about $1.4 billion (as of March, 31, 2022), the ultimate liability that results from a possible global settlement remains uncertain and we believe if reached could exhaust the company's liquidity under its existing capital structure and prospective operating cash flow generation. As a result, we see an increased likelihood of a distressed exchange or below par redemption of its debt occurring within the next 12 months.

Outlook

The negative outlook reflects the probability of a distressed exchange or below par redemption of its debt well within the next 12 months. The negative outlook also reflects our view that deteriorating cash flow generation over the next couple of years and potential liabilities associated with its opioid litigation, result in a current capital structure that is unsustainable

Downside scenario

We could lower our ratings on Endo if we view a payment default, distressed exchange, or redemption inevitable within the next six months, absent unanticipated favorable changes. This could occur if cash flow prospects further deteriorate, potentially stemming from a large litigation settlement or a steeper-than-anticipated decline in sales and profitability. We could also lower the rating if the company announces its intention to undertake an exchange offer of similar restructuring, including a below par redemption of its debt outstanding.

Upside scenario

We could revise our outlook on Endo to stable if we see a reduced likelihood of a distressed exchange or redemption within the next six months. This could occur if financial results trend better than we expect over the next couple of quarters or if the company reaches an agreement to resolve its opioid litigation that we believe may be manageable under its existing capital structure.

Company Description

Endo is a specialty branded and generics pharmaceutical company headquartered in Dublin. The company primarily markets patented, branded generic, and generic drugs in the U.S. (an estimated 97% of 2021 revenue), with a small international presence, primarily in Canada. Endo operates through four business segments: Branded Pharmaceuticals, Sterile Injectables, Generic Pharmaceuticals, and International Pharmaceuticals. Its largest products include Xiaflex and Vasostrict. In 2021, it launched QWO, the first FDA-approved injectable for moderate to severe cellulite in the buttocks of adult women.

Endo acquired Par Pharmaceutical Holdings Inc. and Auxilium Pharmaceuticals Inc. in 2015 for a total of about $10.7 billion.

Our Base-Case Scenario

• In 2022, we expect revenue declines of about 20%-25%, down from our previous expectation of about 10% declines, due to increased competition and lower overall demand for Vasostrict.
• We expect branded specialty and established products revenue growth in the mid-single-digit percentages for 2022, driven by Xiaflex.
• We expect sterile injectable revenue to decline about 50% in 2022 from competition in the Vasostrict and Adrenalin markets.
• Generics revenue to decline (%) in the teens in 2022.
• International revenue declines (%) in the high-single digit area in 2022.
• In 2022, we assume adjusted EBITDA of $750 million-$800 million and adjusted EBITDA margins of 32%-34%, a decrease from about $1.3 billion and 42% in 2021, respectively. This decline stems primarily from our expectation for lower revenue from Vasostrict and ongoing investments to support product launches.
• Free operating cash flow (FOCF) generation of $100 million-$150 million in 2022 and less than $100 million in 2023.
• Litigation settlement payments from unrestricted cash of about $280 million in 2022.
• Our forecast does not include an explicit estimate for opioid litigation liabilities, but we do incorporate the substantial cash balance as a cushion to absorb at least a portion of the potential liability, and we burden EBITDA with ongoing legal expenses.

Based on these assumptions, we estimate the following adjusted credit measures through 2023:

• Debt to EBITDA of 10.0x-12.0x
• FOCF to debt of 0.5%-1.5%.

Liquidity

We view Endo's liquidity as less than adequate, reflecting the company's limited ability to borrow more bank debt given litigation uncertainty and tight covenant headroom, which we expect will limit access to its revolving credit facility. We also believe the company lacks a satisfactory standing in credit markets due in part to ongoing uncertainty surrounding its opioid litigation and deterioration in financial performance.

We believe Endo's sources of capital will substantially exceed uses over the next 12 months, because Endo has a significant cash balance and no substantial debt maturities until 2027. That said, we do not believe that Endo could absorb a low-probability, high-impact events without refinancing because of expected litigation liabilities that could pressure liquidity.

Principal liquidity sources:

• Cash on hand of about $1.413 billion as of March, 31, 2022
• Limited capacity on its revolving credit facility given covenants; and
• Cash funds from operations of about $150 million over the next 12 months.

Principal liquidity uses:

• Litigation settlement payments of about $280 million in the next 12 months;
• Annual term loan amortization of $20 million; and
• Capital expenditures of about $90 million annually.

Covenants

Endo's $1 billion revolving credit facility contains a maximum senior secured net debt to EBITDA of less than 4.5x that springs into effect when more than 30% is drawn. As of March 31, 2022, the amount drawn under its revolving credit facility was at 30% or lower, and therefore remains compliant under the covenant. However, we believe leverage, per the covenant calculation, could exceed 4.5x if our forecast EBITDA decline by less than 15%, which we believe will constrain further availability under its revolver.

Environmental, Social, And Governance

Endo International PLC E-2 S-4 G-3

Risk management, culture, and oversight Social risk factors have a negative influence on our credit rating analysis of Endo International, which manufactures, distributes, and previously marketed opioid products, exposing it to ongoing legal and regulatory action. Endo also faces risk from generic price-fixing accusations. The size and timing of any potential cash outflows for settlements remains highly uncertain. Our credit rating analysis of Endo is also moderately negatively affected by governance factors because the company's strategy has led to repeated product related litigation (including opioids and transvaginal mesh), resulting in billions of dollars in expenses and settlements.

Issue Ratings - Recovery Analysis

Key analytical factors

• Endo's capital structure consists of a $1 billion first-lien secured revolver (assumed 85% drawn at default with an interest rate of LIBOR plus 500 basis points) maturing in three tranches in 2022, 2024, and 2026, a $2 billion first-lien secured term loan B due in 2028, about $3.31 billion of first-lien secured notes maturing 2027 and 2029, $940 million of second-lien secured notes, and about $1.34 billion of unsecured notes with the most significant maturity in 2028.
• Our '3' recovery rating on the first-lien debt indicates the expectation for meaningful (50%-70%; rounded estimate: 65%) recovery in the event of default, and our '6' recovery rating on the unsecured notes indicates the expectation for negligible (0%-10%; rounded estimate: 0) recovery.
• Our recovery analysis does not explicitly contemplate a specific amount of legal liabilities related to Endo's sales of opioids because the amount of future liabilities is highly uncertain. Significant litigation liabilities could lead to a scenario with greater unsecured liabilities, forcing the company to default with a higher enterprise value, potentially resulting in higher recovery rates than described below.
• We believe Endo would reorganize in the event of a default because of the strength of its intellectual property--including its patented drugs and generic drug approvals--as well as its organizational development, manufacturing, and marketing expertise.
• We use an enterprise-value methodology to evaluate Endo's recovery prospects. We value the company on a going-concern basis using a 6x multiple of our projected EBITDA at emergence from default, consistent with the multiples we use for similar generic and specialty pharmaceutical companies.

Simulated default assumptions

• Simulated year of default: 2023
• EBITDA at emergence: $798 million
• EBITDA multiple: 6x
• Gross enterprise value at emergence: $4.786 billion

Simplified waterfall

• Net enterprise value (after 5% administrative costs): $4.547 billion
• Valuation split (obligors/nonobligors): 96%/4%
• Collateral value available to secured creditors: $4.483 billion
• Secured first-lien debt: $6.660 billion
• —Recovery expectations: 50%-70% (rounded estimate: 65%)
• Total value available to second-lien debt: $0 billion
• Second-lien debt: $985 million
• —Recovery expectations: 0%-10% (rounded estimate: 0%)
• Total value available to unsecured debt: $64 million
• Unsecured debt: $1.385 billion
• Pari passu secured deficiency claims: $3.163 billion
• —Recovery expectations: 0%-10% (rounded estimate: 0%)

Note: All debt amounts include six months of prepetition interest.

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | Industrials: Key Credit Factors For The Pharmaceutical Industry, April 8, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Ratings List