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S&P cuts Diplomat Pharmacy's rating on deteriorating competitive position

S&P Global Ratings lowered Diplomat Pharmacy Inc.'s issuer credit rating to B- from B based on the company's deteriorating competitive position and worsening financial metrics. The outlook changed to stable from negative.

The downgrade came after S&P lowered the company's issuer credit rating to B from B+ in March, citing higher expected leverage in 2019.

Flint, Mich.-based Diplomat operates as a specialty pharmacy and pharmacy benefit manager. The company recently said it was exploring a potential sale or merger in an effort to maximize shareholder value.

Diplomat lowered its 2019 EBITDA guidance twice in five months, mainly due to increasing pressure in the core specialty pharmacy business and aggressive pharmacy channel management activities by larger competitors.

The rating agency remains skeptical that Diplomat will have a material recovery beyond 2019 due to its moderate scale, higher-than-expected competition and significant management turnover, which increases strategic and financial uncertainties.

Ratings said if Diplomat's EBITDA does not recover in 2020, the company's free cash flow generation might be unable to cover mandatory repayments, putting it at risk of breaching a covenant toward the end of 2020 or early 2021, without a material debt paydown or an acquisition by another company. The ratings action did not factor in the company's recently launched review of strategic alternatives.

In the longer term, significant regulatory risk in the PBM sector could affect the company's profitability.

The rating agency noted that the stable outlook reflects Diplomat's recent credit agreement amendment, which gives it time to stabilize the business or sell assets to reduce its debt.

Moody's also slashed Diplomat's corporate family rating to B3 from B2, citing the deteriorating operating performance of its specialty pharmacy and PBM segments.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.