What happened
Shares of Endo International (ENDP +0.00%) were jumping 12% higher as of 2:50 p.m. EDT on Monday. The nice gain for the drug stock came after Moody's changed its outlook for Endo from negative to stable.
So what
Moody's now thinks that Endo will be able to improve its earnings "modestly" next year. Even better, the credit rating agency expects that Endo's "cash flow will improve significantly as vaginal mesh-related litigation cash outflows roll off." Moody's anticipates that this improved cash flow will enable Endo to better handle major potential expenses related to lawsuits over the company's opioid drugs.
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Endo has seen a lot more bad news than good news lately. Despite reporting better-than-expected revenue in the first quarter, the company's bottom line came in significantly worse than analysts' estimates. A few days after its Q1 update in May, J.P. Morgan analyst Christopher Scott downgraded Endo stock from neutral to underweight.
Even the announcement from Moody's today had a downside. Although the agency now views Endo's outlook more positively, it still downgraded the company's Corporate Family Rating (CFR) to B3 from B2. Moody's also downgraded Endo's senior secured rating to B1 from Ba3, its unsecured rating to Caa2 from Caa1, and its speculative grade liquidity rating to SGL-3 from SGL-2.
None of these are positive changes. Each of Moody's new ratings reflects significant uncertainty and risk related to Endo's ability to cover its corporate bonds. Moody's expressed concern that Endo's opioid-related litigation could negatively impact the drugmaker's access to cash.
Now what
Endo CEO Paul Campanelli thinks that his company is in good shape to turn things around, although this process will take several years. He also expressed confidence in Endo's Q1 update that the company will be able to meet its previously provided full-year financial guidance.
One key thing to watch with the drugmaker now is the outcome of litigation over its opioid drugs. Another is the company's efforts to win approval for Collagenase Clostridium Histolyticum (CCH), an injectable enzyme for treating cellulite. In the meantime, though, investors should expect continued volatility with Endo stock.
