Shares of Valeant Pharmaceuticals (NYSE:BHC), an embattled drugmaker known best for its use of mergers and acquisitions and price increases to grow its top and bottom lines, plunged 27% in October, according to data from S&P Global Market Intelligence. While there are a number of concerns weighing down Valeant from month to month, news of possible criminal charges against former executives was primarily responsible for razing its share price.
According to initial reports from Bloomberg, which hit the newswires at the end of October, U.S. prosecutors could be readying to file criminal accounting fraud charges against Valeant's now-former CEO, J. Michael Pearson, and now-former CFO, Howard Schiller, who ran the company in the interim when Pearson could not due to health reasons.
Based on people familiar with the matter, regulators are looking into how much Pearson and/or Schiller may have known about the company's relationship with now-former drug distributor Philidor Rx Services. Prosecutors are investigating whether or not Philidor was remaining a neutral party in its dealings as a middleman between Valeant and insurers. If Philidor was not acting as a neutral party and was promoting Valeant's more expensive branded products when cheaper alternatives were available, it could lead to criminal charges.
Previously, it was assumed that criminal charges, if they were filed, would be targeted at Philidor's executives, but not at Valeant's. This report suggests that Valeant's former executives won't be immune to possible prosecution, which also means that Valeant, the company, could wind up facing fines, or perhaps future sales restrictions. Investors were clearly not happy with the news.
Valeant continues to possess an attractive valuation, assuming it can meet its profit and EBITDA expectations for the year, which were held steady following the release of its second-quarter results. However, the sheer number of clouds overhanging Valeant remain far too scary and should effectively keep smart investors relegated to the sidelines.
For instance, Valeant is still lugging around more than $30 billion in debt and is essentially being forced to divest its assets in order to loosen the metaphorical concrete blocks around its ankles. If Valeant winds up selling its core assets, it could give up far too much of its future growth to satisfy investors. Similarly, because it's not selling from a position of strength, Valeant may not be able to generate enough cash, or generate its desired results, from the sale of its non-core assets. It appears to be in a no-win situation.
Making matters worse, the company's dermatology business has been shrinking dramatically following its new distribution deal with Walgreens Boots Alliance, and its drug-pricing practices are being closely monitored by regulators.
Until the clouds clear, investors are best off keeping their distance.
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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