Standard & Poor’s on March 16 lowered its credit ratings on Graceway Pharmaceuticals LLC, based in Bristol, Tenn., citing high levels of debt, heavy reliance on one product and looming debt payments. Specifically, S&P lowered the company’s corporate credit rating to ‘B-’ from ‘B’; the ratings agency also lowered its ratings on the company’s $330 million second-lien term loan, due in 2013, to ‘CCC’.
Sales for Aldara, a genital warts cream, accounts for more than 85 percent of Graceway’s sales and could be threatened as early as this year by generic versions, according to S&P. Aldara’s pediatric exclusivity on the drug’s patent expired in February, and several generic competitors have filed with the U.S. Food and Drug administration to make their own version of the treatment. S&P analyst Arthur Wong noted in a press release that competition may be limited because it is difficult to make the cream-based treatment, but it still likely Aldara will lose significant share of the market to lower priced generics.
Graceway also makes a cream called Zyclara that treats a common skin condition, called actinic keratoses, that can lead to skin cancer. Canada has approved that treatment, but its approval by the FDA has been delayed, according to S&P. A branded competitor, Veregen, is also making things difficult for Zyclara.
Graceway generates good cash flow and has steadily reduced its debt, but Aldara’s continued success will be critical to its ability to continue to pay down debt as it matures, according to S&P. Graceway has reduced its debt to just under 4x on an adjusted basis, down from 6x at the beginning of 2008, according to S&P, and the company’s EBITDA margins are routinely above 50 percent. “However, these credit measures can deteriorate quickly if Aldara-related cash flows experience a steep decline,” wrote Wong, who could not be reached for comment. “Such a decline will also challenge Graceway’s ability to meet significant debt maturities in the 2011 to 2013 time frame.”
Executives at GTCR declined to comment for this story, but it wouldn’t be out of character for the firm to pursue more add-on deals to help diversify the company’s product line. GTCR’s investment in Graceway dates back to 2004, when it agreed to invest up to $75 million in Chester Valley Pharmaceutical, a partnership it formed with Robert Moccia, the former president of a dermatological company. In November 2006, GTCR folded Chester Valley, based in Malvern, Pa., into Graceway, which GTCR created with another industry veteran earlier that year when it bought 3M Company’s pharmaceutical business in the United States, Puerto Rico, Canada and Latin America for $875 million.
Graceway has since made three acquisitions, buying the North American rights to Estrasorb, a prescription drug for blood vessel constriction and dilation associated with menopause, in February 2008; the global commercial rights to three investigational dermatological molecules from Pfizer Inc., in July 2009; and the global license to an anti-proliferative agent from Gilead Sciences, in November 2009, according to Buyouts.