News about Valeant Pharmaceuticals Intl (VRX) is coming out so quickly tonight that it is hard to keep pace. Right now shares of the “controversial” pharma company are down 13.38% to $96.70 a share in after hours trading on the recent developments. What happened? Below are some headlines from the past few hours via S&P CapIQ
Two Sequoia Fund Directors Resign as Valeant Losses Mount
The two largest pharmacy-benefit managers said they’ re moving to terminate Philidor RX Services, the mail- order pharmacy that’ s a partner of drugmaker Valeant Pharmaceuticals International Inc., from their networks.
When Buying Pharmacies, Valeant Affiliates Haven’t Disclosed California License Denial [ProPublica]
Morgan Stanley Said to Revise Pharma Loan Deal Amid Valeant Rout
Philidor Said to Modify Prescriptions to Boost Valeant Sales [Bloomberg Business]
: UnitedHealth’s Optum says it is also ending its relationship with Philidor; CVS & Express Scripts dropped Philidor earlier today. CNBC
Remember, Pershing Square’s special conference call is scheduled tomorrow morning so we assume some unlucky intern is taking lots of Dyanavel and updating slides.
Here is what the sell side is saying
Today, CVS Health Corp. (CVS, $103.80, Outperform, by Jennifer Lynch) said it would remove Philidor RX Services, the pharmacy network that is affiliated with Valeant, from its network of pharmacies after an audit of its practices. “In accordance with CVS/caremark’s standard auditing protocols, over the last several weeks we have been monitoring andreviewing the results of recent audits of Philidor’s practices. Based on the findings from those activities, we have terminatedPhilidor for noncompliance with the terms of its provider agreement,” CVS said in an e-mailed statement, according to Bloomberg. Similarly, according to CNBC, Express Scripts (ESRX, $87.15, Market Perform) is also in the process of terminating Philidor from its network and looking at other pharmacies with a Valeant relationship.
Clearly, there is some downside risk to ~7% of Valeant’s revenues; however, at this point the extent of the financialimpact is not clear as some of this business will likely end up going through traditional channels. Therefore, we are notrevising our estimates yet until we gain more clarity; however, we do believe that consensus estimates will soon come down and perhaps sell-side sentiment along with it.
We note that Valeant is currently reviewing Philidor’s business practices and re-evaluating its relationship with the pharmacy. Given today’s developments, the recent headlines, and VRX stock volatility, we would not be surprised to see Valeant shift away from its relationship with Philidor. While relationships with traditional specialty pharmacies may be less profitable and potentially result in slower growth for selected products, we expect such relationships would be significantly less controversial. With shares trading at 7x/6x 2016e/2017e, we believe anything to reduce controversy in the Valeant story would be a positive for shares (even if it came at the expense of modest earnings erosion)
We simply do not believe this will have a material impact. Of its top 30 selling brands, only 9 flow through the specialty pharmacy, with the largest being Jublia, Solodyn, and Wellbutrin XL. Ending the specialty pharmacy relationship does not block the prescription from getting fulfilled through regular retail distribution channels, as all of the drugs are on formulary and none have been placed on exclusion lists. This action merely increases the steps for a patient to gain co-pay assistance, increases the risk of the pharmacy switching to an alternate therapy, and reintroduces nuisance factor for the physicians who get calls from the pharmacy seeking an alternative. We remind investors that if VRX’s entire specialty pharmacy exposure went away, only 6-7% of its net revenues would be at risk of slowing growth. We believe CVS and ESI are using the current “crisis” as an image-boosting exercise
Stay tuned for more either tonight (or hopefully) at least not until tomorrow morning.
Disclosure: My wife owns SEQUX in her IRA account.