One of the worst things that could happen to Valeant is happening now

Shares of Valeant Pharmaceuticals took another dive Thursday on Bloomberg reports that two large pharmacies are terminating their agreements with Philidor, a specialty pharmacy with an exclusive deal to distribute Valeant products.

Shares closed down 9% in after-hours trading.

CVS Pharmacy is ejecting Philidor from its Caremark network, citing “noncompliance” with its provider agreement.

“CVS/caremark maintains a broad national network of 68,000 pharmacies,” it said in a statement emailed to Bloomberg. “In accordance with CVS/caremark’s standard auditing protocols, over the last several weeks we have been monitoring and reviewing the results of recent audits of Philidor’s practices. Based on the findings from those activities, we have terminated Philidor for noncompliance with the terms of its provider agreement.”

Express Scripts is also terminating its relationship with Philidor and evaluating its relationship with other pharmacies connected to big drug companies, known as “captive” or “specialty” pharmacies.

Health insurer Blue Cross Blue Shield is also evaluating its relationship with Philidor, according to Bloomberg.

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Why the breakup?

Philidor has become the central focus of recent controversy surrounding Valeant. Until last week, when Valeant held its Q3 earnings call, shareholders were unaware that it and its “network” of smaller pharmacies even existed.

But a lawsuit between Philidor and a member of its network, R&O, and the accusations of a California short-seller have brought it into the spotlight.

In its lawsuit, R&O alleges that, through a shell company, Philidor purchased it in order to be permitted to do business in California. Philidor had been denied a permit to operate there last year.

Once Philidor had control of R&O, the suit alleges, it used R&O’s insurance credentials to sell drugs around the country. It also asked R&O’s pharmacist-in-charge, Russell Reitz, to sign off on sales made by other pharmacies in Philidor’s network.

Bloomberg also reports that Philidor employees have said that they were instructed to change codes on prescriptions to make it appear that a doctor ordered a patient to buy a more expensive Valeant drug, rather than a cheaper generic drug.

From Bloomberg:

An undated Philidor document obtained by Bloomberg provides a step-by-step guide on how to proceed when a prescription for Valeant dermatological creams and gels including Retin-A Micro and Vanos is rejected. Similar instructions for changing the DAW indication are supplied for patients who are paying in cash.

On a call Monday, Valeant said that though it has the option to buy Philidor for $US100 million, it has no legal responsibility for Philidor. It insisted that Philidor is run independently, despite that it sells Valeant products almost exclusively.

But a report from The Wall Street Journal revealed that the ties between the two companies may be incredibly close. The two companies, it said, share employees who use different names at Philidor and Valeant.

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