Valeant Pharmaceuticals International (NYSE:VRX) had a dreadful year in 2015, and its stock lost 29% of its value. Looking ahead, this Fool is on record with the prediction that stock will post another negative return in 2016. As such, I've given a bit of thought to issues that could be catalysts for further price declines. Here are three:
1. Valeant CEO Mike Pearson returns from medical leave well into the year, or resigns.
On Dec. 28, Valeant announced that its CEO, J. Michael Pearson had been hospitalized due to a severe case of pneumonia, and was taking medical leave of indefinite duration.
The timing could not have been worse: The man who is the architect behind Valeant's aggressive growth strategy was going missing in action (albeit involuntarily) during a crisis.
Investors' confidence in the sustainability of Valeant's debt-fueled acquisition strategy had been badly shaken. The out-of-the-blue disclosure of a convoluted relationship with a specialty pharmacy -- seized upon by a high-profile short-seller -- had also damaged the company's reputation.
A little less than a month later, on Jan. 25, Valeant provided an update from Pearson that was devoid of any specifics beyond the fact that there had been "unexpected complications," that he was "on the road to recovery," and that "the timing of my return remains uncertain."
This is a company that badly needs some lessons on how to communicate with its shareholders. (Compare, for example, Valeant's press releases to the quality of information Warren Buffett provided Berkshire Hathaway shareholders when he was diagnosed with stage 1 prostate cancer.)
It's impossible to know how the market might react to an announcement that Pearson's return was being delayed until well into 2016; after all, investors gave a warm reception to the news that former CFO Howard Schiller had been named interim CEO. Nevertheless, it's certainly a potential catalyst for further losses: Valeant Pharmaceuticals is a "story" stock, and Pearson has been its author.
With regard to the possibility that Pearson might resign, that looks remote at this stage, but nothing can be definitively excluded in this corporate saga.
2. Valeant's borrowing costs rise
I'm cheating by including this, but I have seen it mentioned as bearish argument and I wanted to discuss why I don't think that this will be a significant factor this year.
It is true that debt has been the essential fuel for Valeant's acquisitions binge. At the end of the third quarter, the company was carrying nearly $30 billion in net debt (debt minus cash) on its balance sheet, and was levered nearly 5-to-1 (debt-to-equity ratio).
However, Valeant faces limited debt redemptions in 2016. (Its earliest bond maturity is in 2018.) Furthermore, the company has no floating-rate debt, according to Bloomberg. Finally, if the start of this year is anything to go by, we can probably expect the Fed to hike rates at a very gradual pace in 2016 (if at all).
However, the magnitude of its debt load does ensure that there will be no significant acquisitions this year.
3. Organic revenue growth misses expectations
In mid-December, Valeant reduced its revenue guidance for the fourth quarter of 2015 and gave guidance on 2016 revenues for the first time, forecasting a range of $12.5 billion to $12.7 billion. The midpoint of that range represents a 20% increase over 2015's estimated revenues. (We'll learn the real numbers on Feb. 22.) Moreover, Valeant's CEO assured investors and analysts at the time that double-digit organic growth would continue in the years beyond 2016.
Those look like aggressive goals to me. The issue is not without consequences, as Valeant's underlying organic growth story has been a bit of a mystery for the market. Serial acquisitions have complicated Valeant's accounting; there is a fear those purchases have been camouflaging weak organic growth. Conversely, now that the pace of acquisitions must slow dramatically, these figures will become more transparent. Any significant disappointment relative to the market's expectations would necessarily have a negative impact on the stock.
As New York University finance professor and valuation guru Aswath Damodaran wrote last November, "my experience with these companies [that grow primarily through acquisitions] is that they inevitably hit a wall, either because they become too large to stay disciplined or because the accounting creates too many opportunities to obfuscate and hide problems."
There is one thing you can count on
We can't be sure any of these catalytic events will come to pass this year, but even if they don't, there will surely be others -- positive or negative -- that will have a big impact on the shares. What is nearly certain is that Valeant's stock will remain volatile in 2016.
Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.