After years of enviable growth and brash moves, Valeant Pharmaceuticals appears to be succumbing to a broken business model.
The beleaguered drug maker held a lengthy and much-anticipated briefing on Tuesday for investors, and the news wasn’t pretty — the company cut its 2016 revenues and earnings forecast more than expected and disclosed weakness in areas of its business that caught investors by surprise. Particularly disturbing is the possibility that Valeant is in danger of defaulting on some of its debt.
Not surprisingly, Valeant stock plunged 51 percent during the day on huge trading volume, continuing a slide that began last fall amid accusations by short sellers that the company had improperly booked revenue and used a specialty pharmacy to manipulate insurance reimbursements for key products. Even before the conference call ended, some Wall Street analysts recommended that investors flee.
“The results … are worse than we feared,” Wells Fargo analyst David Maris wrote in an investor note.
The development underscores a harsh reality for the drug maker. Its once-heralded game plan — which eschewed R&D investment in favor of buying companies, and then raising drug prices to previously unseen heights — is falling apart.
The unraveling can be traced to growing anger over the cost of medicines, which prompted a number of investigations into its accounting and pricing practices. But the problem is compounded further as Valeant repeatedly failed to provide investors with specific information, revised remarks too many times – a press release contained a $600 million typo, and failed to follow standard accounting rules.
“The ever-shifting commentary from Valeant … suggests that management simply does not have a handle on the health of its own business,” wrote Piper Jaffray analyst David Amsellem in an investor note. He titled his report, “A broken company, with no easy answers.”
On the call with investors, Valeant executives said adjusted earnings for the year are forecast to be $9.50 to $10.50 a share, which is less than its previous guidance of $13.25 to $13.75 a share issued last December. And revenue for 2016 is expected to wind up somewhere between $11 billion and $11.2 billion, down from an earlier estimate of $12.5 billion to $12.7 billion.
Valeant executives explained the forecasts were dialed back, in part, because of lowered expectations for gastrointestinal and dermatology drugs. Pharmacy benefits managers, for instance, are tightening restrictions due to the high prices that Valeant charges, as well as concerns about its reimbursement tactics and a new distribution deal with Walgreen. Analysts suggested high inventories may be a factor.
Meanwhile, Valeant executives are unsure when its audited 2015 financial statements will be filed with the US Securities and Exchange Commission. And if the drug maker fails to file by April 29, its bank lenders could demand accelerated payments under existing credit agreements. Investors holding Valeant notes could do the same by May. Breaching covenants could cause a default on its $30 billion in debt.
The news marks a steady stream of unpleasant surprises for the company’s investors over the past six months and, as a result, Valeant’s market capitalization has plunged more than $76 billion since August.
For instance, Valeant relied on Philidor Rx Services to boost sales and handle insurance reimbursement, and in late 2014, it acquired a $100 million option to buy the company, but didn’t acknowledge this until short sellers disclosed the arrangement last fall. Last month, the drug maker disclosed it erroneously booked $58 million in sales after delivering drugs to Philidor, instead of waiting for patients to receive them. As a result, Valeant is restating earnings for the past two years.
“Its business model wasn’t sustainable,” said Erik Gordon, a business and law professor at the University of Michigan. “But you have to hope that its fiery crash doesn’t discourage entrepreneurs from experimenting with other new models, because it is not clear that the mainstream pharma model is the best one to address the new realities of health care.”
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