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Lannett Company, Inc. -- Moody's downgrades Lannett's liquidity rating to SGL-3; ratings affirmed

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Rating Action: Moody's downgrades Lannett's liquidity rating to SGL-3; ratings affirmed

Global Credit Research - 07 Dec 2020

New York, December 07, 2020 -- Moody's Investors Service ("Moody's") downgraded Lannett Company, Inc.'s ("Lannett") Speculative Grade Liquidity Rating to SGL-3 from SGL-2. Moody's also affirmed Lannett's existing ratings including the B3 Corporate Family Rating, B3-PD Probability of Default Rating (PDR), and senior secured term loan B rating at B2. The outlook remains stable.

The downgrade of Lannett's liquidity rating to SGL-3 reflects the risk associated with Lannett's term loan B maturing in less than two years (November 2022) and its reduced revolver size. The company's $125 million revolving credit facility has expired and the company has instead put in place a $30 million asset based revolving credit facility. The SGL-3 also reflects material term loan amortization of nearly $40 million per year and a muted cash flow outlook given increased competition on key products, including fluphenazine.

Despite rising near-term financial leverage due to competition on fluphenazine and a slower than expected ramp of revenue in a branded product, Numbrino, the stable outlook reflects Moody's view that debt repayment and new product launches will result in declining leverage over the next 12 to 18 months. It also reflects Moody's expectation that Lannett will be proactive in refinancing its term loan B well in advance of going current.

Lannett Company, Inc.: Rating downgraded:

Speculative Grade Liquidity Rating to SGL-3 from SGL-2

Ratings affirmed:

Corporate Family Rating at B3

Probability of Default Rating at B3-PD

Senior secured term loan B at B2 (LGD3)

Outlook Actions: The outlook remains stable RATINGS RATIONALE

Lannett's B3 Corporate Family Rating is constrained by high financial leverage which Moody's expects will rise to about 6.5x debt/EBITDA by the end of June 2021 (Lannett's fiscal year end). Moody's expects debt/EBITDA to improve thereafter closer to 6x in fiscal 2022 assuming debt repayment and contributions from new products. The rating is also constrained by Lannett's moderate size with revenues of between $500-$550 million and concentration in the US generic drug market. Critical to Lannett's ability to reverse near-term earnings declines will be the cumulative contributions from higher value new product launches from Lannett's internal and acquired pipeline and strategic in-licensing deals. Lannett has several sizeable market opportunities that remain in development but are several years away. Importantly, Moody's expects Lannett to generate positive free cash flow over the next 12-18 months.

The SGL-3 reflects Moody's expectation that liquidity will be adequate over the next 12-15 months. Lannett had $101 million of cash at September 30, 2020 prior to fully repaying its term loan A balance of $42 million in November 2020. Mandatory debt amortization payments on its term loan B are about $40 million per year until the remaining balance comes due in November 2022. Unless refinanced, Moody's believes amortization payments will be manageable for Lannett, but will consume most of its free cash flow. Moody's forecasts free cash flow at more than $40 million over the next 12 months. Lannett has a new $30 million asset-based revolver that expires in December 2023 or 91 days prior to the term loan if not refinanced. The term loan B has no financial covenants and the ABL has a springing fixed charge covenant only when available drops below 15% (less than $4.5 million).

Social risk considerations include Lannett's exposure to the lawsuit into generic drug price fixing by State Attorneys General. Lannett is a defendant alongside 33 other pharmaceutical companies and individuals. There is no set trial date, and Lannett's exposure to similar civil complaints also remain unresolved.

The B2 rating on the senior secured term loan has a one-notch positive override factor as compared to the rating from our Loss Given Default for Speculative-Grade Companies. This reflects Moody's view that Lannett's capital structure is subject to change due to the need to refinance its term loan maturing in November 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to a downgrade include if Lannett does not proactively refinance its term loan B or if liquidity weakens primarily due to weaker cash flow and lower cash balances. Negative legal developments related to its exposure to investigations into alleged generic drug price fixing could also result in a downgrade.

The ratings could be upgraded if Moody's expects debt/EBITDA to be sustained below 5 times. Greater certainty related to generic drug price fixing exposure would likely also be needed.

Lannett Company, Inc. ("Lannett"), headquartered in Philadelphia, Pennsylvania is a generic drug manufacturer and distributor with capabilities in difficult-to-manufacture products. Lannett reported revenues of $545 million for the twelve months ended September 30, 2020.

The 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.

REGULATORY DISCLOSURES

For 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. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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Morris Borenstein VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jessica Gladstone, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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