By Lisa Lee
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 (N:MNK) 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 (L:PSON) 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)