UPDATE: S&P Lowers Outlook on Valeant Pharma (VRX) to Negative; Notes Increased Philidor Disclosure

(Updated - October 27, 2015 12:35 PM EDT)

Standard & Poor's Ratings Services affirmed its ratings on Valeant Pharmaceuticals International Inc. (NYSE: VRX), including its 'BB-' corporate credit rating, and revised the rating outlook to negative.

"The negative rating outlook follows Valeant's increased disclosure about its financial and operating relationship with Philidor, a network of specialty pharmacies that distributes some of its products. Valeant said this channel represents 5.9% of revenues for the first nine months of 2015, and 6.8% of third-quarter revenues," said credit analyst David Kaplan. "We estimate this channel represents a higher proportion of the U.S. Branded segment's script volumes than revenues (as cash pay products are reimbursed at lower levels, or unreimbursed in this channel, as part of patient assistance programs to increase access). As such, we estimate that this strategy likely had a meaningful impact on Valeant's reported volume growth rates on a year-to-date basis."

Our negative rating outlook reflects risks to our base case expectation that Valeant can sustainably grow revenue and EBITDA, given the potential reputational, legal, and regulatory risks the company is facing. Our base case expectations also incorporate our view that the company will manage its acquisition-driven growth strategy such that leverage will decline to 4x-5x (after adjusting for acquired EBITDA).

We could lower our rating if Valeant increases the pace of acquisitions, or experiences material operational headwinds, such that we expect adjusted leverage to be sustained materially above 5x. We could also lower our rating if we believe that ongoing investigations are likely to imperil the company's ability to maintain organic revenue growth and strong levels of cash flow, which could indicate more serious issues surrounding the sustainability of the businesses.

We could revise the outlook to stable if we gain more confidence that ongoing investigations are unlikely to harm Valeant's business. Under this scenario, we would expect to have greater confidence that the company would maintain adjusted debt leverage of about 5x or lower, consistent with historical levels.

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