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Valeant — The Next Shoe To Drop

Summary

Valeant was downgraded to "B+" from "BB-" by S&P after Valeant severed ties with Philidor.

Philidor represents about 6% of Valeants revenue through January. Loss of that revenue stream would come at an inopportune time.

Valeant's $32B debt load is at 6.3x EBITDA. It could deteriorate to 6.7x EBITDA after the loss of Philidor.

If Valeant's EBITDA slides further due to a loss or its reputation with doctors or pharmacies, its debt could become untenable.

Valeant's inability to service its debt could be the next shoe to drop.

Valeant CEO Mike Pearson. Source: forbes.com

When it rains it pours for Valeant (NYSE:VRX). Late last week CVS (NYSE:CVS) and Express Scripts (NASDAQ:ESRX) dropped Philidor from their pharmacy networks due to noncompliance with provider agreements. Valeant promptly cut ties with Philidor, citing a loss of confidence in the specialty pharmacy group's ability to operate in a manner acceptable to patients and doctors. Now Standard & Poor's has lowered the company's credit rating to "B+" from "BB-" with a negative outlook:

Valeant severed ties with its affiliate, specialty pharmacy network Philidor RX Services, after leading pharmacy benefit managers ("PBMs") terminated their relationships with Philidor ... We view the abrupt nature of this separation as likely to exacerbate the loss of revenues and profits we already anticipated from the reduced visibility of that channel.

While this channel represents only a modest amount of Valeant's revenues (6.8% of its third quarter revenues), we believe these developments further harm Valeant's already tarnished reputation. We believe this could compromise the company's ability to effectively market its products to doctors through its...


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