Moody's revises PharMEDium's rating outlook to negative after FDA warning letter; affirms B3 CFR

Global Credit Research - 31 Jul 2014                

 

Approximately $635 million rated debt affected

New York, July 31, 2014 -- Moody's Investors Service changed PharMEDium Healthcare Corporation's ("PharMEDium") rating outlook to negative from stable, while affirming its ratings including the B3 Corporate Family Rating and B3-PD Probability of Default Rating. Moody's also affirmed the B1 rating on the first lien senior secured facilities and Caa2 rating on the second lien term loan.

The change of outlook to negative follows the company's disclosure of receipt of a warning letter from the Food and Drug Administration ("FDA") in late July based on observation made during FDA inspection of PharMEDium's facilities in early 2013. The letter cited that PharMEDium violated certain quality requirements under the applicable Good Manufacturing Practices ("cGMPs") and demanded corrective actions within fifteen days upon receipt of the letter. Moody's believes the issuance of a warning letter indicates an escalation of regulatory and compliance risk facing the company and the entire drug compounding industry. The negative outlook contemplates the increased uncertainty on the company's operation and liquidity from the warning letter, if not resolved appropriately and timely, could lead to potential product recalls, or other enforcement actions or customer losses.

The affirmation of the B3 CFR, however, reflects Moody's expectation that the company will proactively manage the risks in order to resolve the issue and alleviate the FDA's concern in the near term. In addition, Moody's anticipates management will use its best effort to avoid service disruptions to customers while working through this issue. Barring potential disruption from the FDA letter, Moody's also expects the company to continue to grow its revenue and earnings, remain on-track with its deleveraging plan and maintain a good liquidity.

Ratings affirmed as follows:

Corporate Family Rating at B3

Probability of Default Rating at B3-PD

First lien senior secured credit facilities at B1, LGD3

Second lien senior secured term loan at Caa2, LGD5

RATING RATIONALE

The B3 CFR incorporates the business risk arising from PharMEDium's singular focus on the sterile compounding outsourcing service industry and heightened regulatory risk in light of increasing regulatory oversight of the industry. These upcoming changes, as contemplated in the Drug Quality and Security Act (DQSA) and recently proposed interim guidance on applicable Good Manufacturing Practices ("cGMP") for drug compounding industry (subject to final approval) by the FDA, could materially impact the company's operations and financial results. The rating also incorporates the company's small size, fragmented industry characteristics and aggressive financial leverage deployed in the capital structure as a result of the LBO transaction. Moody's expects debt/EBITDA to remain materially above 5.5x in the next 12-18 months.
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