What happened
Shares of Valeant Pharmaceuticals (BHC 0.95%), the embattled drugmaker that's predominantly grown via acquisition over the past couple of years, tanked another 23% in March, according to data from S&P Global Market Intelligence. While there is a laundry list of issues with the company, four factors stood out for the March decline.
So what
The first issue for Valeant was its fourth-quarter results and guidance hangover. On the last day of February, Valeant announced its Q4 results and issued guidance for the 2017 year. In the fourth quarter, the company's Branded Rx drug segment saw sales slip 17%, while its bread and butter Bausch & Lomb operations saw revenue slip 1%. More importantly, Valeant called for just $3.55 billion to $3.7 billion in 2017 full-year EBITDA, which is only about two times more than what it'll pay to service the interest on its debt. That's worrisomely low.
Image source: Getty Images.
Secondly, and building on this first point, Valeant announced that it had completed a number of refinancing transactions in March. While Valeant does need all the flexibility it can get with its hefty debt load, every restructuring is coming with a price, either in the form of fees or higher interest rates. In effect, Valeant keeps buying more time and digging itself into a deeper hole.
Third, Valeant's main cheerleader, Bill Ackman, announced that his hedge fund, Pershing Square Capital Management, was raising the white flag and selling its remaining stake in the company. In total, Ackman's support of Valeant cost his hedge fund about $4 billion. Ackman waiving the white flag confirmed to investors just how much trouble Valeant is in.
And finally, as sort of the icing on the cake, former CEO J. Michael Pearson announced that he was suing the company over share-based compensation that he never received and alleges he is due. That compensation would be worth north of $30 million as of today. It's just another in a series of distractions for the once-mighty drug developer.
Image source: Getty Images.
Now what
And it gets worse folks – there's no simple fix.
Valeant's fourth-quarter report suggested that the company could grow its Branded Rx segment by 2% to 5% in 2017, yet this same segment just delivered a 17% year-over-year sales decline in Q4. The company's acquisition of Salix Pharmaceuticals in 2015 is also looking (thus far) like a terrible decision, and its new drug distribution partnership with Walgreens Boots Alliance appears to heavily favor Walgreens. In other words, even Valeant's reduced expectations may be too lofty.
Furthermore, Valeant is struggling mightily with its debt. The company needs to attract a certain premium to make selling its assets worthwhile, otherwise it'll merely be reducing its debt and making no headway on the all-important debt covenants that allow its lenders to sleep well at night. The company is pretty much in a no-win scenario.
With few redeeming qualities and no sign of a near-term turnaround, Valeant is a stock to continue to avoid.
