Shares of Valeant Pharmaceuticals (NYSE:VRX), an embattled drug developer that's primarily grown through price hikes and acquisitions over the years, tumbled 18% during October, according to data from S&P Global Market Intelligence. The downside catalysts for Valeant, in what was an otherwise quiet month for news, appears to concern its debt and an existing lawsuit against the company.
The first issue is likely tied to a press release on Oct. 16 concerning debt offerings for it and its subsidiary. Though Valeant's management team has worked hard to extend its debt-maturity dates in order to give its product portfolio a chance to turn itself around, the simple fact that Valeant is issuing more debt as it's attempting to pay down what it already owes isn't sitting well with some investors.
The second concern was raised mid-month by Wells Fargo's covering analyst, David Maris. An ongoing lawsuit filed by Depomed (NASDAQ:DEPO) against Valeant claims it's owed over $20 million in unpaid royalties. Maris points out that while the dollar figure itself isn't that big of a deal, the way Valeant recognizes adjusted and non-adjusted earnings is. In particular, Maris and his team are interested in how the company would handle the reporting of a potential settlement with Depomed. He believes the company shouldn't be able to list a settlement as a one-time line item, or benefit in previous earnings periods from not paying the royalty. In short, this noise from Maris raises more questions about Valeant's accounting practices.
The real issue, though, isn't whether Valeant issued notes, or if it'll have to potentially restate what it earned as a result of the Depomed lawsuit. It's whether Valeant can actually reignite growth with its traditional growth engine (price hikes and acquisitions) now cut off.
The company's recently reported third-quarter operating results showed steady organic growth from its two core segments: Bausch + Lomb and Salix Pharmaceuticals. Both of these segments grew by 6% when currency moves and divestments are excluded. Unfortunately, total branded Rx sales still fell 7% on an organic basis, and diversified product sales tumbled by 29%. Overall, we're looking at a 4% decline in organic sales for the company to $2.22 billion. In other words, things still aren't good for Valeant, which is sporting more than $27 billion in debt.
Until we see the company generate actual organic sales growth, I see little reason for investors to put their money to work in Valeant.