With CDS markets implying around a 40% probability of default, Moody's has issued a warning over Valeant's deleveraging prospects (and ability to deliver sustainable growth) putting $31 billion of biotech debt on watch for downgrade. VRX bonds are down dramatically on the day.. not the forst day back at work Pearson was hoping for.
As Moody's writes, this rating action reflects concerns that Valeant’s underlying operating performance is weaker than Moody’s previous expectations, potentially impeding the company’s deleveraging plans, the agency said.
Valeant's Ba3 Corporate Family Rating (under review for downgrade) reflects its good scale in the global pharmaceutical industry with annual revenue above $10 billion, its strong diversity, its high profit margins, and its good cash flow. The ratings are supported by low exposure to patent cliffs, and growth from successful products like Jublia (antifungal) and Xifaxan for irritable bowel syndrome. In addition, the ratings are supported by management's commitment to reduce debt/EBITDA, using excess cash flow for debt repayment.
However, the ratings also reflect moderately high financial leverage (pro forma gross debt/EBITDA of 5.5x), and significant business challenges related to Valeant's pricing strategy and aggressive acquisition appetite.
Valeant is confronting significant scrutiny on its pricing practices, including those on products acquired through acquisitions, and uncertainty related to government investigations. In late 2015, Valeant announced it was terminating its relationship with specialty pharmacy distributor Philidor, and Valeant is transitioning to a new distribution arrangement with Walgreens.
Company’s CFR Ba3 on review for downgrade affecting about $31 billion of rated debt
Bonds are reacting… 2025s down over 2.5pts on the day…
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