Just when you thought it was saffe to pile back into the hedge fund hotel that is Valeant Pharma, the stock prices collapses 18% in 2 days back to 3-month lows. Following a Wells Fargo downgrade on Friday to underperform (due to concerns over the firm's ability to pay back its debt), Deutsche Bank piled on implicitly today with a downgrade for Express Scripts in light of Anthem's over-paying arguments which Jim Chanos claims will weigh on the entire PBM space.
More pain for the hedge fund hotel…As it plunges 18% in 2 days…
With the dead-cat-bounce dying…
Wells Fargo hit them on Friday…
The firm initiated coverage with an "underperform" rating and price target between $65 and $68. Shares plunged more than 8% on Friday.
Valeant will need to use basically all of its free cash flow to pay down its $30 billion in debt, Wells Fargo wrote in a note, the Wall Street Journal reports.
If the pharmaceutical company's tax rate changes or if the company is faced with further investigations, it could struggle to pay back its debt.
And today we have chatter from Jim Chanos that the catalyst for today's move is a negative outlook by Deutsche Bank on the PBM space, manifesting itself in a sharp downgrade of Express Scripts as a result of its agreement with Anthem which Deutsche Bank believes will lead to dramatic earnings revisions.
Express Scripts sank in early trading Wednesday after health insurer Anthem Inc., its biggest client, threatened to ditch it for a competitor unless the pharmacy benefit manager can deliver $3 billion a year more in savings on drug costs.
Given the acrimony between Express Scripts and its largest client Anthem, we increasingly believe Express Scripts is heading towards a significant negative earnings revision as it relates to Anthem, and that the market is not fully discounting this risk. Anthem indicated it believes it over pays ESI by ~$3B on an annual basis, and while that number may overstate the earnings risk to ESI, we do not believe the underlying risk tied to Anthem is fully reflected in the share price. Given the risks of negative EPS revisions, and where we expect the shares to trade upon resolution, we see ~11% potential downside to current levels. We are downgrading ESRX shares to Sell.
While $3B would be a huge earnings figure on a business that’s approaching a $17B run rate, it is not out of the realm of possibility. We estimate the figure is likely closer to $2B, and believe that Anthem may believe it is entitled to ancillary earnings streams that do not directly result from its
book of business.
But that's not all…
Additionally, Valeant has failed to explain what fees Walgreens Boots Alliance (WBA) will charge to distribute its drugs and whether it will achieve as much volume with Walgreens as it did when working with mail-order pharmacy Philidor, the firm continued, according to the Journal.
via Zero Hedge http://ift.tt/1Qxrw51 Tyler Durden