The hits just keep on coming for embattled drugmaker Valeant Pharmaceuticals (NYSE:VRX).
Recently, Valeant's stock broke lower through the $10-per-share price barrier, falling to a level investors haven't regularly seen since 2008. Its market cap of $3.3 billion now sits some 96% below where it was during the summer of 2015. Even more interesting, Valeant's market cap now sits lower in value than what the company projected for its full-year earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2017.
In late February, when Valeant reported its fourth-quarter earnings results and issued its fiscal 2017 guidance, the company estimated that its full-year EBITDA for the upcoming year would fall between $3.55 billion and $3.7 billion. Mind you, this is a company that, at its peak, was valued at roughly 13 times its expected EBITDA, based on the company's one-time projections for $7 billion in EBITDA at the midpoint for fiscal 2016.
Wall Street (rightfully) doesn't trust Valeant's EBITDA forecast
A company valued below its estimated full-year EBITDA is practically unheard of. Then again, collapses of the magnitude that we've seen from Valeant, where a megacap stock has been completely dethroned and picked apart by mounting problems, are pretty rare, too.
Its low valuation relative to its EBITDA implies two things: the EBITDA estimate probably can't be trusted, and the company is in some really deep trouble.
During 2016, Valeant readjusted its full-year EPS and EBITDA forecast on three separate occasions, suggesting to Wall Street that its management team either doesn't have a grasp of how challenging its operations really are at the moment, or it's unwilling to face that reality and let shareholders know how bad things really are.
Just have a look at the company's top-line expectations in 2017 for a clue. Valeant's management fully expects Bausch & Lomb sales to grow by 5% to 7% this year, and for Branded Rx sales, which includes its Salix Pharmaceuticals drugs, to increase by a modest 2% to 5%, according to its conference call.
However, during the fourth quarter we saw Bausch & Lomb sales fall 1% and Branded Rx sales fall 17%. Valeant has done next to nothing to address its PR mess, has been lip-tight about whether it's working through the speed bumps associated with its drug-distribution partnership with Walgreens Boots Alliance, and has given no better explanation as to why it'll deliver positive Branded Rx sales growth other than that investors should trust management. There's little faith in Valeant's ability to meet its EBITDA targets at this point.
Valeant is in deep trouble
But there are far more serious issues at hand than management's inability to forecast sales, EBITDA, and profits.
For starters, Valeant has a monstrous pile of debt that threatens to choke its business model. It ended the fourth quarter with $29.85 billion in debt but has since paid some of this down following the sale of three medicated skincare brands to L'Oreal for $1.3 billion, and the divestment of its Dendreon assets to China's Sanpower for $820 million. This still leaves the company with somewhere between $27 billion and $28 billion in net debt, most likely.
Interestingly enough, the aggregate debt total isn't necessarily Valeant's biggest worry. It's sufficiently moved the maturities on a good portion of its debt out a few years in exchange for higher interest rates and fees. The real problem stems from its ability, or should we say possible inability, to cover the costs of servicing this debt. Valeant forecast the costs to service its debt at $1.85 billion in 2017, implying an optimistic EBITDA-to-interest coverage ratio of two, which is notoriously low. Valeant seems to consistently be on the precipice of breaching its debt covenants and potentially triggering a fire sale of its assets to repay its debts.
At the same time, there's little urgency on the part of Valeant's peers to consider buying its assets at any significant premium. Its peers are well aware of Valeant's debt woes, which leaves Valeant in the precarious position of needing to sell its non-core assets as quickly as possible and for a premium, and not being able to move many of its assets.
Also, Valeant's biggest cheerleader, Bill Ackman of Pershing Square Capital Management, recently waved the white flag, tucked his tail between his legs, and collected the roughly $221 million that remained of the $4.2 billion his fund invested in Valeant. Though people are focused on the $4 billion bath Ackman and his investors took, it's worth noting that he had the foresight to at least preserve his remaining $221 million.
Valeant appears to be a sinking ship in every sense of the word, and it would be a shame to see investors go down with the ship. The investment thesis has changed completely, and there's little sign that a turnaround is imminent.