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Moody's places Mallinckrodt ratings on review after Sucampo deal

Moody's placed the ratings of Mallinckrodt International Finance SA, including the Ba3 corporate family rating and Ba3-PD probability of default rating, under review for downgrade.

The rating agency also affirmed the SGL-2 speculative grade liquidity rating.

In 2014, Moody's transferred Mallinckrodt Plc's ratings to the entity Mallinckrodt International Finance SA due to administrative reasons

The ratings action comes on heels of the company's announcement that it will buy Sucampo Pharmaceuticals Inc. for about $1.2 billion.

Moody's said the acquisition increases Mallinckrodt's gross debt/EBITDA to around 4.9x on a pro forma basis from around 4.4x and reduces its financial flexibility. Mallinckrodt also faces earnings pressure in its specialty generics segment and sales growth headwinds in 2018 on its largest drug, Acthar.

However, the agency believes the deal provides incremental earnings diversification for a few years and improves the company's pipeline of late stage drugs.

The rating agency's review will focus on the earnings outlook and pipeline of Sucampo, Mallinckrodt's deleveraging timeline and capabilities, and the mix of funding sources.

Mallinckrodt's existing Ba3 corporate family rating is supported by the company's moderate scale in specialty branded pharmaceuticals, good free cash flow and healthy liquidity. The rating is constrained by the company's high concentration of profits in one product, Acthar, and in controlled substances.

Acthar accounts for 40% of sales and a greater share of profits. The drug is not protected by any patents; however, companies would face significant obstacles to get a generic copy approved.

Moody's said the ratings are also constrained by Mallinckrodt's "aggressive appetite" for acquisitions that will likely lead to increased leverage from time to time.