S&P Removes Salix Pharma (SLXP) from CreditWatch Negative

Standard & Poor's Ratings Services today affirmed its 'B' corporate credit rating and issue-level ratings on Salix Pharmaceuticals Ltd. (NASDAQ: SLXP) and removed them from CreditWatch, where they were placed with negative implications on Nov. 7, 2014. The outlook is stable.

We had lowered the rating to 'B' from 'B+' and placed the ratings on CreditWatch negative on Nov. 7, 2014, when we learned that inventory levels were significantly higher than previously expected and that the company planned to work that inventory down in 2015 and 2016. That led us to revise our revenue and EBITDA expectations lower and raised questions about the level of end-market demand for Salix's products.

"The rating affirmation and assignment of a stable outlook is based on recent company revenue and EBITDA guidance for 2015 and 2016," said Standard & Poor's credit analyst David Kaplan. This guidance indicates still robust end-market demand for Salix's products and supports the conclusion that sales levels in recent quarters were not grossly inflated by inventory build at distributers and that the build occurred over an extended period.

Although the company's updated plan to accelerate the reduction of distributer inventory enables the company to normalize sales and inventory sooner, we believe this will weigh on liquidity in the near term. We expect a substantial EBITDA loss in the fourth quarter to constrain availability of the revolver for the next few quarters, that inventory will build at Salix as the company pares back sales to work down inventory at distributers without slowing its purchases from contract manufacturers, and that the company is constrained from share-settling the $345 million convertible notes maturing in May 2015. Also, as part of Salix's entering into inventory management agreements with its main distributors, we expect the company to negotiate better accounts-receivable collection terms or to pursue other solutions to meet liquidity needs through 2015.

The stable outlook reflects our expectation that revenues and margins will rise significantly in 2016, once the excess inventory at distributers has been reduced to target levels. We also expect the company to generate positive free cash flow and to remain highly leveraged through 2015.

We could lower the rating if the company is unable to generate free cash flow, if liquidity needs are not adequately addressed in coming months, or if product demand falls materially short of our expectations.

We could raise the rating once adjusted leverage declines below 5x and FFO to debt rises above 12%, providing that we are convinced the company is committed to sustaining those measures on an ongoing basis.

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