What: Shares of Valeant Pharmaceuticals (NYSE:BHC), a drug developer that's perhaps best-known for growth by acquisition, tumbled once again, losing 15% of its market value in May, based on data from S&P Global Market Intelligence. As usual, there was no single culprit, but instead a multiplicity of issues that pushed Valeant's share price lower.
So what: While you can argue which issues had more bearing, the release of 13Fs by professional money managers in mid-May certainly spooked investors. Although we've seen some billionaires adding to their Valeant stakes, far more shares of Valeant were being sold by money managers during the first quarter. I'm far from an advocate of blindly following the trades of billionaire investors, but when billionaires speak, Wall Street tends to listen. As more big-name investors head for the exits, it's a clear indication that Valeant's long-term outlook is still cloudy.
Another issue Valeant encountered in May was unearthed by The Wall Street Journal. Based on correspondence between the Securities and Exchange Commission and Valeant, we learned that the SEC had questioned Valeant's non-GAAP financial measures. Specifically, the SEC zeroed in on Valeant's practice of stripping out acquisition-related costs, which can be substantial, given that M&A has been its primary source of growth. Over the past three years, Valeant has stripped out nearly $1.3 billion in acquisition-related expenses.
Lastly, Valeant received yet another notice of default from bondholders in mid-May after it delayed its first-quarter filing. Valeant can avert defaulting with its lenders by filing its Q1 report by July 18, and the company fully anticipates doing so. However, given that it has more than $30 billion in debt on its balance sheet, the news didn't exactly inspire investors.
Now what: If there were a small bright spot, it's that Valeant Pharmaceuticals did see some takeover interest about six weeks prior, led by a consortium of Takeda Pharmaceuticals and TPG Capital Management. However, there are still plenty of reasons to believe that a sale of Valeant is highly unlikely.
Valeant's woes relate to two major issues that have yet to be dealt with. First, regulators are probing Valeant's pricing practices and business model, which could result in changes. Valeant is one of the poster children of the drug developers known for acquiring new products and immediately boosting their price without making any formulation or manufacturing changes. It's always possible regulators could clamp down on this practice or, worse yet, levy fines on Valeant for what it deems to be unfair pricing practices. Until these probes are cleared, Valeant's business model remains in jeopardy.
The other concern is that there's no clear way for Valeant to deal with its mammoth debt load. Valeant has essentially been cut off from additional lines of credit because of its late 10-K and now its Q1 filing, meaning it has to figure out a way to grow its existing product portfolio and pipeline to pay down its more than $30 billion in debt. Valeant could always consider selling some of its assets to reduce its debt, but this leaves the company with quite a dilemma. If it sells its core assets, such as Bausch & Lomb and/or Salix Pharmaceuticals, it risks giving up too much future growth. If it doesn't sell enough, it simply won't make a big enough dent in its debt load. Furthermore, it could be difficult for Valeant to recognize full value for its assets, given its distressed situation.
When all is said and done, I believe investors would be wise to avoid Valeant at all costs for the time being.