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Grunenthal Pharma GmbH & Co. KG -- Moody's assigns first-time B1 rating to Grünenthal; outlook stable

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Rating Action: Moody's assigns first-time B1 rating to Grünenthal; outlook stableGlobal Credit Research - 19 Apr 2021Paris, April 19, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B1 corporate family rating (CFR) and a B1-PD probability of default rating (PDR) to Germany-based pharmaceutical company Grünenthal Pharma GmbH & Co. KG (Grünenthal). Moody's has also assigned a B1 rating to the proposed EUR500 million guaranteed senior secured notes due 2026 issued by Grünenthal GmbH. The outlook of both entities is stable.The rating assigned to the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and that these agreements are legally valid, binding and enforceable.RATINGS RATIONALEThe B1 rating of Grünenthal incorporates (1) its diversified product portfolio, with the top three drugs accounting for 46% of its 2020 revenue, despite a focus on pain management; (2) its relatively sticky customer base, which slows down the natural sales erosion of its mature drug portfolio; and (3) its good liquidity following the debt refinancing.However, Grünenthal's rating also takes into account (1) its small size, with EUR1.3 billion of revenue in 2020, which limits economies of scale and increases earnings volatility; (2) its limited late-stage pipeline, as projects under development will not generate significant earnings over the next three years; and (3) its mature drug portfolio, which could prompt the company to make acquisitions.Grünenthal recently acquired from AstraZeneca PLC (A3 negative) the European perpetual licenses of Crestor, a cardiovascular drug, and its associated brands. Grünenthal forecasts that these licenses will generate EUR67 million of revenue and EUR64 million of EBITDA in 2021. Grünenthal initially funded the EUR264 million acquisition of Crestor with cash and a drawing under its revolving credit facility (RCF). Proceeds from the proposed EUR500 million bond issuance will be used to repay the EUR210 million drawing under its EUR400 million RCF, the EUR150 million promissory notes (Schuldschein) due 2022 and 50% of its term loan A, pay transaction fees and fund a portion (EUR36.5 million) of the upfront payment for the acquisition of Mestex AG.Grünenthal's product portfolio is mostly made of mature products because its pipeline dried up around 2015, which led the company to change its management and restructure its business model. Although the pipeline has since strengthened, the sale of new drugs developed internally is still many years away.The company's largest selling drug is Palexia, an opioid indicated for the treatment of moderate to severe acute and chronic pain, which generated EUR309 million of revenue in 2020. In Europe, the patent on tapendatol, its compound, expired in July 2020 and its regulatory exclusivity will end in August 2021. Although Palexia has become more vulnerable to generic competition, it remains protected by a portfolio of other patents extending through 2025.Moody's-adjusted gross leverage amounts close to 3x in 2020 pro forma for the refinancing and the acquisition of Crestor and will be in the range of 3.8x-4.0x in 2021-22. During that period, Moody's forecasts that Grünenthal will generate free cash flow of around EUR100 million per year (according to Moody's definition, that is after the payment of dividends), which translates into FCF/debt of around 10%. While Moody's forecasts do not incorporate any M&A, it expects Grünenthal to keep making some acquisitions in the coming years to bolster its pipeline and drug portfolio.Grünenthal has good liquidity, underpinned by a sizable cash position of EUR167 million as of 31 December 2020 (pro forma Crestor acquisition and refinancing), and a EUR400 million RCF maturing in 2026, which will be undrawn after the refinancing. The company extended in February 2021 the maturities of its term loans, which are now due in 2023 and 2024. The next material debt maturity is its EUR92.5 million term loan A due in November 2023.ESG CONSIDERATIONSGrünenthal, like most companies in the pharmaceutical sector, has a high exposure to social risks. In 2020, 41% of Grünenthal's revenue (pro forma for the Crestor acquisition) were generated from opioid products, which can result in addiction. Also, opioids have generally faced significant litigation in the US market. The company does nevertheless not commercialize opioids in the US, where the risk of litigation is highest, and in Europe and its other markets, it has also not been part of litigation on opioids. In Europe, the prescription of opioid drugs is much more limited and controlled than in the US, reducing the overall risk of abuse. In addition, since 2017, the company has been focusing its product acquisitions and pipeline developments on non-opioid drugs and reduced its revenue share from opioid products, a trend which will continue over the medium term. Grünenthal is also involved in litigations on thalidomide, a drug that it withdrew from the market in 1961. So far, the company has not had any final ruling against it. While the outcome of these legal proceedings is difficult to assess, their conclusion is still several years off.Grünenthal operates with a moderate leverage. The company has been active at acquisitions in recent years in order to fill its product portfolio and pipeline. It is a 100%-family-owned company and its 19 shareholders appoint the five members of the supervisory board, who are experienced professionals and have no relationship with Grünenthal's owners.STRUCTURAL CONSIDERATIONSGrünenthal's new capital structure comprises a EUR500 million bond, a EUR92.5 million term loan A, a EUR350 million term loan B, a EUR400 million undrawn RCF and EUR75 million of Schuldschein notes all issued at the level of Grünenthal GmbH, the main operating company of the group and a subsidiary of Grünenthal Pharma GmbH & Co. KG. Grünenthal GmbH represents about 70% of the group's consolidated EBITDA. All debt instruments have a downstream guarantee from Grünenthal Pharma GmbH & Co. KG and the bond and RCF have, in addition, upstream guarantees from Italian subsidiaries representing about 13% of the group's EBITDA.All debt instruments share the same collateral which essentially comprises share pledges on Grünenthal GmbH and offer limited protections to creditors in case of a default. Therefore, Moody's has modelled all instruments as unsecured in its Loss Given Default (LGD) analysis. Moody's rates the bond at B1, in line with the corporate family rating, and ranks it in line with other financial debts and operating leases.Moody's bases its calculation on a 50% recovery rate applicable to financing structures which include a mix of bond and bank debt.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook assumes that the earnings erosion of Grünenthal's portfolio of mature drugs will remain moderate, and in particular that competition against Palexia will increase only gradually and the growth of Qutenza will continue with the recent label extension. Moody's also expects Grünenthal to make small debt-financed acquisitions but that its leverage will remain below 4.5x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could upgrade Grünenthal if it can return to sustainable growth by strengthening its drug portfolio and its pipeline of late-stage products. Quantitatively, a positive rating action would require that Grünenthal maintains a Moody's-adjusted debt/EBITDA ratio of less than 3.5x and continues to generate robust free cash flow.Conversely, Grünenthal's ratings could become under pressure if the earnings of its existing and acquired drug portfolio decline more quickly than what Moody's currently expects. The rating agency could also downgrade Grünenthal if its Moody's-adjusted debt/EBITDA ratio exceeds 4.5x for a prolonged period, for instance, because of a debt-financed acquisition.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Pharmaceutical Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062755. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.CORPORATE PROFILEFounded in 1946 and headquartered in Aachen, Germany, Grünenthal is a family-owned pharmaceutical company focused on pain therapies. It is one of the world's largest seller of centrally acting analgesics, which are compounds that inhibit pain by acting on the central nervous system. In 2020, the company generated EUR1.3 billion of revenue and EUR287 million of Moody's-adjusted EBITDA. Grünenthal owns a portfolio of about 100 products that it sells in more than 100 countries.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. 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