Courtesy of Flickr/Creative Commons.
Owning shares of Valeant Pharmaceuticals International (BHC -0.26%) 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 leading to a gradual price recovery? Our contributors duke it out below.
Sean Williams: It's really difficult to project where Valeant Pharmaceuticals (BHC -0.26%) 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... if... 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 its 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 predications 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:Valeant has a long-standing business practice of ignoring R&D in favor of acquiring small companies, applying steep price hikes to their drugs, and relaunching them. Since 2008, the specialty pharma has completed more than 100 acquisitions, saddling itself with more than $30 billion in debt.
In addition, Valeant recently admitted that price hikes drove almost 80% of the company's sales growth in the first quarter of 2015. As per Rx Savings Solution, the average price increase per drug across 147 drugs was around 75% between 2014 and 2015.
Albert Einstein once said that the definition of insanity is doing the same thing over and over and expecting different results. By that definition, I believe Valeant is threatening to push itself off the ledge. The pharma's most-recent purchase was paying $1 billion for Sprout Pharmaceuticals -- barely a week after the FDA approved its female libido pill. Proving that it has learnt nothing from past mistakes, Valeant immediately doubled the drug's price to $800 a month, neglected to market it, and has seen hugely disappointing sales.
There is the option of breaking Valeant up to unlock value. But once you take its mountainous debt into consideration, the next decade doesn't look promising for Valeant unless it radically changes its business practices.
