Moody's downgraded Mallinckrodt PLC's corporate family rating to B2 from B1 and probability of default rating to B2-PD from B1-PD.

The rating agency issued the downgrade after the company said it filed a lawsuit against the Center for Medicare and Medicaid Services.

The U.K.-based healthcare company's Mallinckrodt ARD LLC unit filed the federal lawsuit against the U.S. Department of Health and Human Services and the CMS for their "unjustified decision" to require the company to change the base date average manufacturer price used to calculate Medicaid drug rebates for Acthar gel.

Blockbuster drug Acthar, Mallinckrodt's largest product, is used to treat systemic lupus erythematosus, infant spasms, multiple sclerosis, rheumatoid arthritis and certain other conditions. Medicaid, which accounts for about 10% of Acthar's $1.1 billion sales, will reimburse Mallinckrodt's Acthar if the lawsuit is unsuccessful.

The downgrade reflects the agency's view that Mallinckrodt's EBITDA will decline over the next 12 months, which will cause the company's debt/EBITDA to be sustained above 4.5x. Moody's said a spinoff of the company's generics business later in 2019 is unlikely to be deleveraging.

Additionally, Mallinckrodt will be subjected to headwinds the next several years, including the loss of exclusivity for its pain medicine Ofirmev in January 2021 and increasing competition on the company's largest franchises.

The negative outlook reflects the rising uncertainty on the reimbursement and pricing of Acthar, along with the risk of up to $600 million in retroactive payments to Medicaid due to the CMS' price changes to the drug.

The possible spin off of Mallinckrodt's generics business will also have a potential negative impact on the company's credit profile, Moody's added.