Bill Miller runs the $2 billion Legg Mason Opportunity Trust. The storied portfolio manager reported that after Valeant Pharmaceuticals (BHC 0.10%) shares tanked in March, he invested 3.5% of his fund in the company's shares. The revelation of Miller's big bet comes on the heels of Valeant's securing a new CEO. Can this new leader orchestrate a turnaround that makes Miller's buy savvy? Read on to learn more about the challenges Valeant faces and whether it makes sense to follow Miller's footsteps into this stock.
Lifting a millstone
For Miller's purchase to pan out, Valeant's management is going to have to overcome the weight of several missteps.
Valeant came under the microscope last year for acquiring two heart medications them and pricing them higher, and the scrutiny that followed that decision led to revelations of a too-close-for-comfort relationship with its specialty drug distributor, Philidor, and an accounting mishap relating to the recording of revenue.
In recognition that Philidor's efforts to fill prescriptions with pricier Valeant medications rather than generic drugs didn't pass muster, Valeant cut ties with Philidor last fall. And earlier this month, the company reported that an ad hoc committee had put the wraps on an investigation into its accounting that will lead to a $58 million reduction to its 2014 revenue.
Ultimately, if those developments get the company back on solid ground, they're a good thing. However, in the short term, those moves have created some obstacles that need to be overcome.
Specifically, the breakup with Philidor significantly dented Valeant's sales, and in March, that led to a massive reduction in the company's sales and profit forecast for this year. Meanwhile, the committee's investigation has forced management to delay the filing of its annual 10-K report with the SEC, and that's put the company at risk of violating debt covenants.
Management has taken action to win support from bondholders in a bid to buy it time, but some lenders aren't cooperating, and as a result, Valeant needs to get its filing to regulators soon to avoid a potential cash crunch that could occur if lenders cry default.
Assuming Valeant files on time, then the debate over its future shifts to whether its newly appointed CEO, Joseph Papa, can overcome operational challenges and whittle away at the company's borrowings.
That will be no easy feat. Valeant's massive appetite for acquisitions has left it saddled with $30.9 billion in debt and little cash on hand. To shore up its balance sheet, Valeant signed on investment bankers to consider selling assets. Little has been said what products could be up for sale, but Valeant has some intriguing brands, including Bausch & Lomb, that could fetch it billions of dollars.
Selling Bausch & Lomb could give the company more financial wiggle room, and it could also put a big dent in Valeant's future growth. Papa, who is coming to Valeant from the top spot at Perrigo (PRGO 0.42%), a generic-drug company that he's been running since the middle of last decade, will need to make some tough decisions about what business segments and products are core assets that need to be kept.
Admittedly, Papa's track record suggests he has the depth of experience and street cred to restore confidence at Valeant. After all, Perrigo's shares have soared under his tenure. However, Perrigo has lost half its value since last fall, when Papa and his board rejected a proposed acquisition by Mylan N.V..
Similarly, Bill Miller once possessed an amazing 15-year track record of beating the S&P 500, but after doubling the S&P 500's return in 2012 and 2013. Miller has since trailed the broader market.
Overall, neither Papa nor Miller's presence is going to right Valeant's ship. Instead, it's going to take time to restore confidence and rebuild a track record of under-promising and over-delivering. Yes, investors will get more clarity into Valeant's financial picture when it decides what assets to sell. But first, the company needs to get its filings in order. Until then, investors might want to take a watchful waiting approach to the company's shares.