Reuters
Moody's revises Elan Corp rating outlook to stable
Thursday November 13, 1:20 pm ET
(The following statement was released by the rating agency)
Approximately $2 Billion of Rated Debt Affected
NEW YORK, Nov 13 - Moody's Investors Service (News - Websites) affirmed the ratings of Elan Corporation plc (Irish:ELN.I - News; London:ELN.L - News; NYSE:ELN - News; Caa2 senior implied). At the same time, Moody's revised the rating outlook to stable from negative.
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The change in outlook to stable from negative reflects Elan's recent issuance of new equity totaling $173 million, and a new convertible note of approximately $460 million. Moody's believes that this infusion of cash helps reduce near-term liquidity risk associated with approximately $494 million of LYONs, which become putable in December 2003, and $450 million of EPIL II debt due in June 2004. As a result, Moody's believes that the potential for a near-term rating downgrade has been mitigated. The stable outlook also recognizes the progress Elan has made to date on its recovery plan, including asset divestitures, headcount reduction, and wind-down of joint ventures.
The affirmation of Elan's Caa2 senior implied rating reflects Moody's continuing significant concerns about Elan's high debt burden, its future cash flow generating capability, the execution risk associated with its clinical pipeline, and the ongoing SEC investigation into Elan's accounting practices. Against the backdrop of high debt levels and negative cash flow, Moody's believes that Elan will continue to be challenged to meet its debt obligations, particularly if there any delays or disappointments associated with the Antegren clinical trials.
Assuming that Elan's LYONs are put in December 2003 (which Elan has announced it will satisfy in cash), the company's debt load will still be sizeable at close to $2 billion, consisting of $450 million of EPIL II debt maturing in June 2004, $390 million of EPIL III debt maturing in March 2005, $650 million of Athena notes maturing in 2008, and $460 million of new convertible notes due 2008. Although the EPIL II/III debt is supported by investments in public and private companies, past writedowns of Elan's investments (as well as EPIL II/III investments) could indicate that the current valuation of EPIL II/III investments may not be sufficient to cover these obligations. Moody's estimates that Elan will have approximately $900 million of reported cash and cash equivalents at year-end, following repayment of the LYONs and the $100 million acquisition of product rights previously sold to Pharma Marketing. Although Elan continues to streamline its operations and reduce the rate of cash burn, Moody's believes it is uncertain whether this cash will be sufficient to last through 2005, or whether Elan will be dependent upon refinancing.
Following the divestitures of significant numbers of products and other assets, Elan's remaining cash-generating assets comprise a small portfolio of products (the most significant of which are Maxipime anti-biotic, Azactam anti-biotic, and Zonegran for epilepsy). The company reported cash burn during the third quarter of 2003, and the first nine months of 2003. Although it is extremely difficult to forecast Elan's cash flow generation, Moody's currently expects that free cash flow from (after capital expenditures) will continue to be negative in 2004 and 2005.
Moody's believes that longer term, Elan's ability to eventually become cash flow positive heavily rests upon the success of Antegren, currently in Phase III trials for multiple sclerosis and Phase III trials for Crohn's disease, which is being developed in a collaboration with Biogen. Earlier this year, Phase III data for Antegran in Crohn's disease did not meet a clinical endpoint, although additional studies are ongoing. Moody's believes that even under an optimistic scenario, Antegren would not be marketed prior to 2005 for Crohn's disease and 2006 for multiple sclerosis.
Although there are other compounds in development, Moody's believes that Elan's future cash flow generation capability is extremely reliant upon this particular product. Moody's notes that products launched from the pipeline in the last several years, including Frova for migraines and Myobloc (a neurotoxin), have not generated significant sales.
The stable outlook reflects Moody's belief that Elan's liquidity improvements should help cover its cash needs at least through 2004. Beyond this timeframe, the direction of Elan's ratings will depend primarily upon the company's prospects for cash flow generation and its ability to obtain refinancing in support of its debt obligations, which may heavily depend on the Antegren clinical trials. The Caa2 rating for senior unsecured debt obligations therefore continues to reflect Moody's believe that there exists a risk of default, and that less than full recovery would likely occur in this event. Under this scenario, Moody's believes there would exist greater uncertainty in the recovery values for the EPIL II/III noteholders, therefore contributing to the Ca rating for all subordinated obligations.
The following ratings were affirmed:
Elan Corporation plc
Caa2 senior implied
Caa2 issuer rating on Elan Corporation plc
Athena Neurosciences Finance, LLC
Caa2 notes guaranteed on a senior basis by Elan Corporation plc
Elan Finance Corporation Ltd.
Ca notes guaranteed on a subordinated basis by Elan Corporation plc
Elan Pharmaceutical Investments II Ltd.
Ca notes guaranteed on a subordinated basis by Elan Corporation plc
Elan Pharmaceutical Investments III Ltd.
Ca notes guaranteed on a subordinated basis by Elan Corporation plc
Moody's does not rate Elan's new convertible notes due 2008 issued in November 2003.
Elan is a specialty pharmaceutical and drug delivery company headquartered in Dublin, Ireland, with current areas of pharmaceutical focus in neurology, pain management and autoimmune diseases. |
