S&P downgrades Depomed

S&P said it lowered the long-term issuer credit rating on Depomed Inc. to B from B+.

The outlook is negative.

The agency also said it affirmed the B- issue-level credit rating on the 2.5% convertible notes due 2021.

The recovery rating is 5, reflecting 10% to 30% expected default recovery.

The downgrades reflect an expectation that adjusted debt leverage will remain at higher than 5x because of slightly lower expectations for Gralise sales and the company's need to acquire new pharmaceutical assets to replace the eventual maturation of its limited drug portfolio, S&P said.

The agency said it previously believed Depomed had the capital resources to both de-leverage to the mid-4x range and invest in new products, but now S&P said it does not believe that both are possible.

To sustain the business in the long-term, the company will need to invest more heavily, likely keeping leverage at higher than 5x, the agency explained.

S&P also said it believes the very heavy amortization of the current loans is straining liquidity and reducing the company's cash cushion.

This is partially offset by Depomed's good cash flow before debt amortization, which is estimated at about $70 million to $80 million annually through 2020, the agency said.

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