Beleaguered drug maker Schein Pharmaceutical Inc. said this week that it expects to default on more than $200 million of loans syndicated by Chase Manhattan Corp.
Market participants said the loans, scheduled to mature in December 2001, are likely to be amended to allow Schein to recover from a series of regulatory and business setbacks that have forced the Florham Park, N.J., company into negotiations with bankers.
Schein did not disclose the nature of the default Tuesday. Market sources said the company has been unable to meet financial targets mandated in the loan covenants but is likely to keep making payments. That would put the company into what the market considers a "technical default." The company reported total loan debt of $116 million at the end of the third quarter, according to a federal filing.
The company's loans, which include a $101 million term loan and $100 million credit line, were priced initially at the London interbank offered rate plus 150 basis points. Pricing could rise as high as 300 basis points based on the company's level of overall debt, according to Thomson Financial Securities Data. The loans closed in November 1998.
The announcement came as Schein also said it had hired a Canadian Imperial Bank of Commerce subsidiary, CIBC World Markets Corp., and Evercore Partners Inc. to advise it on strategies, including a possible sale.
Schein said it is expecting fourth-quarter earnings to be "well below" analysts' consensus estimate, and it said it would trim its work force by 15%. Analysts had expected earnings to be 16 cents a share, according to Zacks Investment Research Inc.
Food and Drug Administration officials forced the company to pull some of its most popular drugs from the market after Schein's plants in Phoenix and Marsam, N.J., were found out of compliance with FDA guidelines, according to a Standard & Poor's report issued late Tuesday. The FDA is imposing a sweeping crackdown on drug makers, analysts said.
Schein's difficulties with the FDA, though extreme, may signal a trend for pharmaceutical companies and their lenders, analysts said. If other FDA-targeted companies such as Abbott Laboratories and Watson Pharmaceuticals Inc. - which have also been cited but not disciplined by the agency - can navigate the regulatory crackdown, their prospects may not be so grim.
"Many of the pharmaceutical companies in the same profile as Schein are on the upswing, mostly because of the potential of their business," said a source familiar with the industry. "Schein is sinking."