October 22, 2015 / 7:09 PM / in 2 years

TRLPC: Valeant's falling secondary loan price pulls pharma companies down

NEW YORK, Oct 22 (Reuters) - US secondary loan prices for pharmaceutical companies are falling with slumping equity levels as growing political and regulatory pressure on drug pricing threatens the growth model that underpins lending to the sector.

Valeant Pharmaceutical Inc’s secondary loan price on its D, E and F term loans fell in volatile trading on Wednesday and continued to fall to 92.25-92.75% of face value on Thursday, according to traders.

Its share price also saw a second day of declines after influential short-seller Citron Research said that the drugmaker had used specialty pharmacies to create ‘phantom sales’.

Valeant refuted the claims in the report, which also highlighted risks in Valeant’s business model based on rapid expansion driven by acquisitions and aggressive price hikes.

Around US$17bn of Valeant’s market value has been wiped out since Tuesday, Reuters reported. Its loans were trading at 97.75-98.75 on Tuesday before the report, down from 99.5-100 in late September.

Valeant’s problems have pulled trading levels lower on a range of pharmaceutical loans, including Concordia Healthcare’s US$1.865bn-equivalent loan, which broke in trading earlier this week.

The term loans of drug companies Endo International and Mallinckrodt were also pulled lower.

Concordia’s loans were heavily discounted after a difficult primary syndication to compete with falling secondary prices which offered better relative value.

Concordia’s dollar term loans initially traded up over the discount level of 94.5 on Wednesday, but fell to 94.25 bid after Citron’s report. It traded at 94.5-95.5 on Thursday, according to loan investors.

Global specialty healthcare company Endo International’s term loan slumped to 93.5.-96.5 on Wednesday but recovered to 98.5-99.5 as loan investors tried to find a pricing level for the sector. On Thursday, the term loan weakened to 97.5-98.

Irish pharmaceutical company Mallinckrodt’s term loan B fell 1.25 points in the two sessions to 94.75-95.75 and the term loan B-1 dropped 1.5 points to 95.5-96.5 by Thursday. The company’s loan is nearly 4 points lower than late September, when it was trading at around face value.

Dublin-based specialty pharmaceutical company Horizon Pharma’s term loan, which had been quoted 50bp higher at 96.5-97.5 on Wednesday, fell to a 94 offer on Thursday. The term loan is relatively illiquid and loan investors on Wednesday had warned it would move lower.

GROWTH BROKEN?

The drop in pharmaceutical companies’ secondary loan and equity prices started in late September, when Democratic presidential nominee Hillary Clinton criticized pricing in the specialty drug market.

Loan investors are concerned about pharmaceutical firms’ response to lower growth opportunities that are depressing share prices and valuations.

“The growth model is broken,” said a loan trader.

Valeant’s CEO J. Michael Pearson predicted a new drug pricing environment for the pharma industry when it posted quarterly earnings on Monday and said its 2016 outlook was based on price hikes of no more than 10%.

Low secondary prices continue to put pressure on primary syndications and could result in further discounts and could raise borrowing costs for the sector moving forward.

In addition to Concordia’s discount, a US$250m term loan for Sucampo Pharmaceuticals was discounted to 97 with a spread of 725bp over Libor and a 1% Libor floor and was quoted at 97.25-97.75 in the secondary market on Tuesday.

Secondary prices for generic drug companies with affordable pricing policies are holding up better. Amneal Pharmaceuticals’ term loan B was at 99.5-100 on Wednesday, down slightly from 100-100.75 market from mid-September.

Companies that focus on patents and intellectual property have also been less affected. Royalty Pharma’s term loan is still around par at 100-100.25 on Wednesday. (Editing By Tessa Walsh and Jon Methven)

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