Owning shares of Valeant Pharmaceuticals International (NYSE:BHC) has been as much fun as banging your head against a brick wall during the past year. The company faces a virtual black hole of problems: massive debt, a crumbling business model, and no less than three ongoing federal probes of its pricing practices and accounting.
A few weeks ago, the already-depressed shares took a huge one-day tumble. After the company finally reported its overdue Q4 results and slashed all of its 2016 financial forecasts, they fell an agonizing 50 percent.
But there's been a big shake-up at Valeant recently, with former CEO Michael Pearson on his way out. And at least one famous investor is betting big on a turnaround -- Bill Ackman. The hedge-fund manager now sits on Valeant's board and continues to champion the stock, despite how much Valeant has hurt his fund, Pershing Square Holdings. Pershing's investors were thrashed last year with a negative 20.5% return, net of fees.
Much of that loss was due to a huge position in Valeant. (According to the latest 13D filing, Pershing owns 34 million shares, or more than 9% of the specialty pharma.)
What's ahead for this specialty pharma long term? Is it more likely to continue to fall apart, or do a U-turn? Our contributors duke it out below.
Sean Williams: It's really difficult to project where Valeant Pharmaceuticals will be in 10 years when the best minds on Wall Street don't have the remotest clue where it'll be the next 10 days, but I'll give it a shot because I've closely followed its ascent and subsequent implosion. My suspicion is that if Valeant manages to survive the next decade, it's going to be struggling mightily.
The company's biggest issue is its $30.9 billion debt load. Valeant isn't a drug developer in the traditional sense. It acquires drugs in areas that often have minimal competition, then boosts the price on those drugs following a relaunch. It may not sound like the most ethical tactic, but it's been quite profitable for Valeant.
The problem is that, in order to buy new products and companies, it's had to dip deep into its debt coffers. Without the ability to use debt and issue stock, Valeant's M&A growth strategy slows to a crawl, or halts completely. With its share price down more than 85% from its August peak, and its lenders prepared to offer tough collection terms if Valeant fails to file its annual report in a timely manner, the company's primary business model is in serious jeopardy.
The other issue here is that prescription drug reform may not get swept under the rug this time. Even if sweeping industry reforms aren't passed, lawmakers appear to have taken exception with Valeant's pricing practices. It's always possible Valeant could be cleared by U.S. lawmakers, and may continue to grow its business by acquisitions. But I see lawmakers targeting price increases on acquired therapeutics without any formulation or manufacturing change as a strong possibility.
However you slice the bread, things don't look good for Valeant, even over the long run.
Brian Feroldi: There's no doubt that Valeant Pharmaceuticals is a complete mess right now, so predicting this company's long-term future is a complete stab in the dark, at best. Between the leadership challenges, accounting issues, and its massive debt load, the company is skating on thin ice right now, and anything could happen.
However, while it's impossible to know what the next headline will be about Valeant, I think it's important for investors to remember that this company's acquisition strategy did bring some terrific products into the company's portfolio that have real value in the marketplace. Those products will likely keep producing revenue and profits no matter what is happening at the headquarters.
As an example, in 2013, Valeant shelled out $8.7 billion to acquire Bausch & Lomb, one of the biggest and most-respected brand names in eye care. At the time of the acquisition, Bausch & Lomb had worldwide revenue of approximately $3.3 billion, and the company was highly profitable, so even if Valeant Pharmaceuticals went belly up from its huge debt pile, there would still be value in the company's pipeline.
Personally, I'm of the belief that Valeant is such a mess right now that it will likely have to sell off some of its assets in order to satisfy its bond holders. Also, because the name Valeant has been cast in such a negative light, I'd bet that the company will likely have to rebrand itself down the road. If my predictions come true, then 10 years from now, the company will look completely differently than it does today.
Still, even though this company has products that hold real value, I personally have no interest in buying shares, even at today's seemingly "low" price. There's simply too much uncertainty in the air for me to feel like my money would be in good hands. While I'll readily admit that Valeant has real assets that could make today's price look screamingly cheap, I'm content to keep far away from this train wreck.
Cheryl Swanson: As I see it, the key risk to Valeant right now is that investors could decide this company is headed for imminent default and abandon it, further crashing its stock. Good news emerged on that front recently, however, with Valeant moving a step closer to getting a default waived by sweetening its offer to debt holders. Valeant also announced that an internal inquiry into its deal with specialty pharma Philidor had closed, and no additional items were identified to require another restatement. (The committee had previously discovered that Valeant had incorrectly reported $58 million in sales in 2014.)
While there's no way of telling what will happen to this company over the next decade, Valeant and its creditors stand to gain more from this company remaining a solvent entity. And Valeant still owns real products and real customers -- so there is at least a pathway to becoming a stable company again. Among those assets are valuable dermatology and gastrointestinal drugs, as well as a prized eye-care business that at least one health-care analyst (Eric Axon from CreditSights) believes is worth in the neighborhood of $20 billion.
Personally, I think that $20 billion is a pipe dream. But that doesn't mean Valeant can't claw its way out of the dark hole it is in. The company has settled its civil lawsuit with Philidor, it is shedding disgraced executives, and it has signed a 20-year distribution deal with Walgreens. I wouldn't buy Valeant's stock in its current crisis, because I expect further huge volatility, and I like to sleep at night. But once it completely cleans house and finds a new CEO, that will at least go a long way toward getting it headed toward a better future.