Shares of Valeant Pharmaceuticals (BHC 5.06%), a pharmaceutical company that's primarily grown through M&A in recent years, plunged 15% during the month of September, according to S&P Global Market Intelligence. Weakness in Valeant's share price can be primarily traced to two factors.
The first issue Valeant contended with relates to the follow-through of its management team concerning drug pricing. On Sept. 16, Valeant issued a press release noting that it had contracted with 13 of the 14 national group purchasing organizations to provide rebates of between 10% and 40% to hospitals on cardiovascular drugs Nitropress and Isuprel, depending on their purchasing volume. For those who may not recall, Valeant acquired both drugs from Marathon Pharmaceuticals in Feb. 2015 and hiked their list prices by 525% and 212%, respectively.
However, according to David Maris, an analyst at Wells Fargo, Valeant has been raising the price of some of its other drugs well beyond the rate of inflation. Furthermore, Bloomberg uncovered through interviews that some hospitals have yet to receive these discounts. Valeant is already under close watch by lawmakers for its pricing practices, and additional evidence of perceived price-gouging could be bad news for Valeant.
The other issue is the company's monstrous $31 billion debt pile. Valeant outlined plans during the second quarter to sell non-core assets generating about 20% of its annual revenue in order to reduce its debt. Valeant is aiming to get $8 billion for its assets, or roughly 11 times the combined EBITDA of these businesses.
But, Deutsche Bank analysts Gregg Gilbert and Greg Fraser see otherwise. The duo believes Valeant could be a bit overzealous with its expectation to net $5 billion in sales over the next 18 months, and has even gone so far as to suggest that Valeant could be required to take on $1.5 billion more in debt to cover capital shortfalls in 2017.
It was another poor showing for Valeant in September, which is something shareholders have unfortunately become accustomed to. What's more, things are unlikely to get better anytime soon with its debt situation still very serious (even given amendments with its lenders), and its core business struggling.
One of the bigger issues Valeant is likely to face when trying to unload its non-core assets is that it has little bargaining power. Its peers are well aware that Valeant's debt woes have backed it into a corner, so they're less likely to get into a bidding war, or even give Valeant fair pricing, on its assets. Without the ability to access additional credit, Valeant's M&A machine has ground to a halt.
Also, Valeant has struggled with its existing core businesses. During the second quarter Valeant reported a 55% decline in year-over-year dermatology sales, which is normally the company's bread and butter growth segment. Much of the blame for this decline is being attributed to a new drug distribution agreement with Walgreens Boots Alliance, which still has kinks to be worked out.
My suggestion would be for investors to remain safely on the sidelines until Valeant demonstrates a clear turnaround.