It's been a truly abysmal nine-month period for Valeant Pharmaceuticals' (NYSE:BHC), with shares of the company down more than 90% and $80 billion in market value since peaking in August. Unfortunately for investors, things once again took a turn for the worse on Monday.
Valeant's quarterly report is a dud
Despite the bright side of appeasing its lenders by filing its first-quarter earnings results, albeit later than expected, there wasn't much at all within Valeant's report to be excited about. Based on its restated Q1 2015 results, total revenue increased 9% in the latest quarter to $2.37 billion, almost entirely on account of acquisitions made over the past year. If we look at things organically, we see that revenue declined by a double-digit percentage, or $289 million. This came on top of a $52 million adverse impact from currency fluctuations and a negative impact of $22 million from divestitures and discontinuations.
All the while, selling, general, and administrative expenses ballooned 42% to $813 million, pushing Valeant's GAAP net loss for the quarter to $373.7 million, or $1.08 per diluted share. On an adjusted basis -- remember, Valeant strips out acquisition-related costs in its non-GAAP reporting -- the company earned $1.27 a share, down from the $2.05 in adjusted EPS it reported in Q1 2015.
Additionally, as reported by my Foolish colleague Todd Campbell, Valeant's drug distribution deal struck with Walgreens Boots Alliance (NASDAQ:WBA) isn't running as smoothly as expected. Valeant noted that problems with script fills and reimbursements have led some scripts to be filled at a loss, especially within its dermatology segment. Considering the issues Valeant had with its prior drug distributor Philidor Rx Services, it needs this long-term deal with Walgreens to work, but that's simply not happened so far. Price cuts for cardiovascular drugs Nitropress and Isuprel are also negatively affecting sales.
The real damage done can be seen in the company's forecast for the full-year. Valeant's updated forecast calls for sales to range between $9.9 billion and $10.1 billion in 2016, and adjusted EPS to range between $6.60 and $7. Even with this reduced forecast, Valeant is trading at less than four times this year's EPS. However, here's an example of how quickly Valeant's full-year forecast has fallen:
- On March 15, 2016, Valeant had forecast $11 billion to $11.2 billion in full-year sales, and $8.50 to $9.50 in adjusted EPS for full-year 2016.
- On Dec. 16, 2015, Valeant offered full-year 2016 guidance of $12.5 billion to $12.7 billion in sales, and adjusted EPS of between $13.25 and $13.75.
In other words, in less than six months we've gone from a midpoint of $13.50 in 2016 adjusted EPS to a midpoint of $6.80, and expected revenue at the midpoint has plunged by $2.6 billion. No one, not even management, is exactly certain where the floor is.
This large stakeholder just cut its position big time
Making matters worse, Valeant's now-previous largest stakeholder took a large amount of its chips off the table recently. Ruane, Cunniff & Goldfarb noted last month, according to FactSet, that it owned 30.31 million shares of Valeant, which was nearly a 9% stake in the company. However, based on a Tuesday filing with the Securities and Exchange Commission, Ruane, Cunniff & Goldfarb has cut its stake to just 4.72%. This move pushes activist investor Bill Ackman and his fund, Pershing Square Capital Management, even more into the spotlight as Pershing now becomes Valeant's largest shareholder, owning a 6.3% stake, according to 13F filings from the latest quarter.
Institutional money managers cutting bait and running for the exit isn't anything new for Valeant. Despite some billionaires taking stakes in Valeant, according to 13F filings, far more shares were sold by billionaires in the latest quarter than bought. Furthermore, we witnessed concerted efforts by high-profile portfolio managers to evict Valeant. Brahman Capital, Viking Global Investors, and Lone Pine Capital combined to sell more than 21.7 million shares of Valeant stock during the first quarter.
Valeant's biggest issue remains unresolved
At the heart of Valeant's issues, beyond just its current lack of pricing power and the hiccups experienced between it and Walgreens, is its $31.3 billion in long-term debt. This debt is a concrete block around the ankles of Valeant's acquisition-based business model, and with its business model currently flailing, the company's access to additional debt has essentially been cut off.
As we saw during the first quarter, the company paid a whopping $425.7 million just on servicing its $31.3 billion in debt. This is up nearly $129 million from the prior-year period. As a side note, perhaps just as mind-boggling is that share-based compensation rose by nearly 80% to $63.5 million from $35 million from the prior year. With debt reduction in mind, paying out quite a bit more in share-based compensation in Q1 doesn't make much sense.
Valeant is currently left with few paths to reduce its debt other than to seriously consider asset sales -- but even this is no white-knight solution. If Valeant chooses to hang onto its most valuable assets (i.e., Salix's product portfolio and pipeline, and Bausch & Lomb), it risks not raising enough equity via divestitures to make a dent in its debt load. If it does part ways with one of its core assets, it could give up a lot of its future growth prospects, which would more than likely further reduce adjusted profit forecasts.
There's also the problem that Valeant is in the spotlight. Other companies are fully aware of Valeant's current situation and therefore are unlikely to pay a premium for any of Valeant's assets. It doesn't make sense to get into a bidding war when Valeant's creditors could turn up the heat and cause a fire-sale event. This could make it even tougher for Valeant to get top dollar for its divested assets.
For what it's worth, Valeant has managed to pay back more in debt than was even due in 2016, so it's not as if its lenders are knocking down the door to get their money back. However, Valeant's secured and unsecured lenders are clearly concerned about its future, and investors should be too after what was another dismal full-year sales and profit forecast. I've said it before and I'll say it again: The safest place for you and your money is the sidelines for the time being.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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