Investors sliced Valeant Pharmaceuticals Intl Inc’s (TSE:VRX, NYSE:VRX) value in half last Tuesday. The reason why Valeant’s stock plunged by 51% in a single day is because the Canadian drug giant reported weaker-than-expected fourth-quarter results, cut its 2016 forecast, and raised fears about defaulting on its debt. When all was said and done, VRX stock lost about 61% last week.
VRX stock is now hovering around $27.00, representing a loss of about of about $13.0 billion in market capitalization since the company’s earnings announcement.
Valeant’s earnings fell drastically short of analysts’ expectations. The company reported a net loss of $336.4 million, which is a stark contrast to the net profit of $462.6 million expected. Valeant blamed the loss largely on costs associated with restructuring and acquisitions.
Even after adjustments, Valeant still fell well short of expectations. Adjusted earnings for the quarter were $875.7 million, while analysts were expecting earnings of $942.8 million. Revenue of $2.8 billion was in line with analysts’ forecasts, but the company reduced previous sales and guided lower for the first quarter of 2016.
Michael Pearson, whom the company announced on Monday will eventually be stepping down as Valeant’s CEO once a replacement is found, told investors during a conference call that the company will underperform in the first quarter because of “higher-than-expected inventory reductions” and the “cancellation of almost all price increases.” (Source: “Valeant slashes guidance, warns of default,” MarketWatch, March 15, 2016.)
On Monday, the company also announced that Bill Ackman, whose hedge fund, Pershing Square Capital Management LP, owns a majority of the company, was joining Valeant’s board of directors. In a statement, Ackman said he is disappointed and surprised by the earnings report and that he’s ready to take a “much more proactive role” at the company to “protect and maximize” his investment’s value. (Source: “Valeant Pharmaceuticals: Live Reaction To Its 40% Share Drop,” The Wall Street Journal, March 15, 2016.)
Pearson also said on the conference call that “management transition issues” and “continued organizational distractions” were also expected to hurt earnings in the upcoming quarter. (Source: MarketWatch, op cit.)
In a sign of more bad news for the company, Valeant has delayed filing its 2015 annual report with the U.S. Securities and Exchange Commission (SEC). The report was due February 29, but the drug maker said that it is investigating its former relationship with Philidor Rx Services, a specialty online pharmacy.
Eyebrows were raised last October after a report revealed that Valeant had a previously undisclosed relationship with Philidor. Valeant said that it has since launched an internal investigation on the matter.
In February, Valeant announced that about $58.0 million in sales to Philidor were recognized at the wrong time and as a result, financial results for 2014 and 2015 have to be restated.
If the 2015 annual report is not filed by April 29, 2016, Valeant risks defaulting on its debt, but the company said it’s hoping to get an extension on that date. The company also said that it is launching a process this week with bank lenders in the hopes of extending deadlines for the filing of its 10-K and 10-Q quarterly reports for the first quarter of 2016.
As of December 31, 2015, Valeant’s long-term debt stood at $30.3 billion. The company gave no guidance on how much of that debt it plans to pay down this year.
Pearson also said that the company is considering selling off non-core assets to improve company liquidity. Pearson didn’t say what those assets could be, but he said the company isn’t considering a sale of a “major platform.” (Source: MarketWatch, op cit.)
Valeant grew into one of the world’s most valuable pharmaceutical companies mainly through its strategy of acquiring smaller companies. But over the last few months, analysts have cut their price targets on VRX stock on negative news, including investigations, criticism of the drug maker’s prices and business practices, and the hospitalization of company CEO Michael Pearson.
Valeant is under investigation by U.S. prosecutors over its drug pricing and distribution practices. The company has been criticized for buying the rights to certain drugs and then quickly raising their prices by a significant amount. Investors have become increasingly concerned about whether that is a sustainable business model if regulators put a cap on drug prices.