Valeant CEO Michael Pearson
Valeant Pharmaceuticals (BHC -0.58%) CEO Michael Pearson is back from a medical leave of absence, and he's facing a significant challenge. Valeant's shares have seen their value cut in half over the past few months as a string of bad news has derailed its business model and put its financials on shaky ground. What's Pearson saying about the risks facing his company? Read on to find out.
Quote No. 1: Anticipating a growth slowdown
While our businesses continue to grow, we are now forecasting a lower growth rate in certain businesses such as dermatology given the continued external pressure for managed care, the pricing environment and our slower than expected start in 2016.
In the past, healthcare payers took it on the chin because of Valeant's price increases, but in the wake of increasing public price scrutiny, it's unlikely payers will let that happen again.
Previously, Valeant maintained its pricing power by relying on Philidor, a specialty online pharmacy that helped ensure Valeant drugs were used to fill prescriptions, rather than cheaper alternatives. In response to industry pushback, Valeant ended its relationship with Philidor, which in turn, has forced Valeant to negotiate directly with payers.
Those negotiations are leading to price concessions and rebates that will hurt Valeant's revenues and profits, and as a result, management lowered its full-year sales outlook to between $11 billion and $11.2 billion from between $12.5 billion and $12.7 billion. It's also reduced its EPS outlook to between $9.50 and $10.50, down from prior estimates of between $13.25 and $13.75.
Over time, price cuts and rebates could lead to improved access on drug formularies, which in turn could drive unit volume growth. If that happens, then these price cuts could eventually turn out be a good thing for Valeant. Until then, however, investors will be left digesting a heck of a lot of uncertainty.
No. 2: Finding cash
We are taking steps to launch a broad-based cost reduction program ... We are also currently exploring divestitures of non-core assets, which will enhance our liquidity.
Pearson's focus on cost-cutting and divestitures in the company's fourth quarter conference call came in response to worries surrounding its massive debt obligation and its limited cash cushion. Valeant owes creditors $30.9 billion, and its cash stockpile is just a shade north of $1.4 billion.
Given that $19 billion of its debt will come due over the next nine years, improving the company's liquidity is vital -- especially if sales and profit growth will be slower than they have been in the past.
But that's not the only liquidity risk the company faces. A delay in filing its annual report with the SEC violated covenants on its debt that could result in lenders filing a default notice. If lenders press the issue, it could limit Valeant's access to cash at a critical time.
No. 3: Say bye-bye to 'buy-reprice-relaunch'
The world has changed to some degree since December, but we have to do a better job. We've had some under-performing businesses; that's on us.
What Pearson really meant is that the world has changed for his company, as well as for those of his competitors that also embraced a buy-reprice-relaunch growth strategy.
That strategy led to riches in the past, but future success in the industry will require growth from within, rather than through M&A. That mindset is a bit foreign to Valeant, so its stumbles in orchestrating a transition to it aren't too surprising.
Whether or not Pearson has the team, products, and pricing right to succeed in this new world won't be known for a while; as a result, investors can't be blamed too much for being nervous.
Make no mistake, it's great to see a corporate leader take responsibility, especially since Pearson has been away on a medical leave of absence and therefore, can't be held fully responsible for the company's most recent missteps.
But while admirable, his admission and the company's cut in guidance still make investors wonder if management has a full grasp of the size and scope of the impact that changes in the business environment are having on Valeant. If it doesn't, then more cuts to its financial guidance could be looming.
