One way to save Valeant – stop being Valeant

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The time to discuss Valeant’s dismantling has arrived. Another surprise set of negative financial disclosures sent shares spiralling to their biggest one-day loss ever, and the speciality pharma conglomerate now is considering selling assets to deal with looming debt payments.

Valeant has now bled away four-fifths of its valuation since it began answering charges about its pricing and distribution practices in October, and each new recovery plan fails to restore the faith of its investors. Perhaps a better strategy might be to become something other than the price-hiking, money-borrowing, company-gobbling Valeant we have come to know.

Even management has come to realise this. Chief executive Michael Pearson, now returned from a medical leave that only heightened uncertainty, yesterday talked up changes in distribution channels, such as moving dermatology and ophthalmology from the controversial Philidor speciality pharmacy to Walgreens, a well-known US name.

Mr Pearson also emphasised restructuring in some underperforming divisions, cost-reductions – presaging layoffs – and an effort to strengthen relationships with payers who may have been put off by some of its pricing practices (After Turing, the industry’s biggest price gougers, September 23, 2015).

In tatters

And if those were the only bits of news, Valeant Pharmaceuticals International might have started today worth close to twice as much as it actually did. Unfortunately, the management team shattered investors first with an announcement in its press release that it was setting an Ebitda guidance for the next four quarters at $6.2bn-$6.6bn, and then in an analyst call yesterday surprisingly lowering it to $6bn.

That sparked an incredible 51% loss for a group that had been a darling of the biopharma bubble. As the shares cratered, analysts began openly challenging the management’s understanding of its own business – which raises questions about the company’s borrow-and-buy strategy that has seen it spend $35bn on 36 acquisitions in five years and amass a debt pile of more than $30bn.

Parts of that debt are at risk of default under financial reporting covenants that set deadlines for filing the company’s annual report with the SEC. The management team is now seeking a 30-day extension to that covenant, which would give it until April 29. ISI Evercore analyst Umer Raffat called this filing “by far the single most important catalyst for Valeant near-term” to avoid a demand for repayment.

Regardless of its ability to meet those deadlines, Valeant management appears increasingly concerned about the debt – company treasurer Linda LaGorga said some of the revenue from selling company assets would be used to pay it down.

The first step

Valeant has taken a first step, which is admitting it has a problem. But if another key step to recovery is to stop acquiring products with uncertain commercial promise, Valeant has already stumbled.

After a series of baffling transactions in 2015 – bankrupt cell therapy company Dendreon, the safety-tainted psoriasis antibody brodalumab, and female libido pill company Sprout – Valeant struck again by in-licensing Central and Eastern European rights to Contrave from Orexigen Therapeutics, which just re-acquired US rights from Takeda. No terms were disclosed other than that Valeant will sell the pills at an “agreed transfer price.”

In the universe of Valeant’s problems, the Orexigen deal looks to be a rather small one. Yet it is emblematic of how Valeant finds itself in such a predicament. Contrave, sold as Mysimba in Europe, has fallen short of expectations, and payers in Valeant’s commercial territory are not likely to be friendly to price increases.

If anything, Valeant should be working to rid itself of its Mysimba-like assets and focus on strong performers. Valeant says it is changing, but its actions say otherwise. Unflattering comparisons to the over-acquisitive industrial conglomerates of old are fitting here – if Valeant cannot, as some analysts now believe, get a grip on its multiple business lines, it just may be time to let some of them go.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @ByJonGardner on Twitter

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