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S&P revises outlook on Depomed to negative

S&P Global Ratings affirmed its B+ corporate credit rating on Depomed Inc. and revised the outlook to negative from stable.

The specialty pharmaceutical company in December agreed to license its opioid pain medication Nucynta to Collegium Pharmaceutical Inc.

Depomed also announced a restructuring under which it would slash 40% of its staff and relocate its corporate headquarters resulting in $70 million of annual savings.

The rating reflects the company's relative lack of size, scale, and diversity, given its dependence on its Nucynta pain franchise, and the drug's limited market share in the pain treatment market.

S&P said negative outlook reflects greater uncertainty to Depomed's strategy, operations, and deleveraging plan after its agreement with Collegium. The agency believes the company will increase EBITDA by about $40 million in 2018, and use its cash to repay about $57 million in debt and make a $50 million acquisition adding about $5 million in EBITDA.

The rating agency believes the company would need to execute its reorganization plans with little disruption to generate EBITDA to meet its leverage forecast that adjusted leverage will fall below 5x in 2018, from 6.1x as of the third quarter of 2017. The agency thinks the restructuring plans could disrupt sales to Depomed's other marketed products and will likely result in higher-than-normal restructuring costs, which could pressure free cash flow and keep leverage above 5x.

S&P also believes that Depomed's plan to focus on neurology and orphan disease drugs makes sense in the long term due to ongoing pressure in the opioid market, but it creates significant uncertainty for the company's identity and operations.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.