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Valeant: Big Trouble in Big Pharma

Shares in the drug company accused of price gouging just fell 51% in one day. Someone fetch the violin.

by Adam Gale
Last Updated: 16 Mar 2016

Chief executives shouldn’t obsess about the share price. Trading is a game, after all, and stock a swinging speculative asset that often doesn’t reflect the underlying growth or profitability of a business. But when your share price chart looks like this, it’s probably time to start paying attention.


Canadian pharmaceutical ex-giant Valeant is rapidly turning into Mike Teevee, the incredible shrinking boy from Roald Dahl’s Charlie and the Chocolate Factory. Except Roald Dahl’s Mike eventually stopped shrinking – the same may not be said for Valeant. The company’s stock fell 51% yesterday, and it’s 86% down from where it was in September. Roughly speaking, that’s $70bn (£50bn) of shareholder value that’s been sluiced in six months.   

The cause? A veritable cocktail of doubts and bad news that includes:

Looming debt default. The company failed to issue its annual results, which could result in Valeant’s creditors demanding faster  repayments its $30bn debt. That would happen if the firm’s 10-K regulatory filing (already a fortnight overdue) isn’t made by April 29. Chief executive Michael Pearson told investors yesterday that Valeant would probably file in April, but it ‘can’t commit to that’. Reassuring...

Political pressure. Valeant’s business model is to buy existing generic drugs with little competition and then increase the price. R&D plays second fiddle. This has led to accusations of price gouging from the likes of Hillary Clinton no less. But in the wake of the Martin Shkreli debacle – and now that Valeant is facing an SEC investigation – it’s announced it’s rethinking its strategy.

Accounting errors. Valeant yesterday cut its earnings per share guidance between 21% and 31% for 2016. On Tuesday it said it expected EBITDA to be between $6.2bn and $6.6bn, before revising it down to $6bn later in the day. Perhaps it changed its mind? Indeed, that isn’t the only accounting anomaly Valeant has had to admit to. It already acknowledged in February that it would have to restate its 2014 and 2015 results to correct for an unusual accounting practice regarding its links to pharmacy Philidor.  

‘We have to do a better job.  We’ve had some underperforming businesses, that’s on us,’ said Pearson, who has recently returned from sick leave. ‘So it’s a bit of a starting-over point at this point for me in the company and clearly if we don’t deliver again, that’s on me.’

Investors – which include Rolls-Royce’s new pal ValueAct - appear to agree. William Ackman of Pershing Square Capital Management said Tuesday’s announcement caused Wall Street to ‘lose total confidence in the company’.

Some would say there’s a certain justice to this. Europe’s semi-socialist distaste for big pharma is usually blunted by a tacit acknowledgement that profits play a vital role in developing new, life-saving drugs. But when the drug company doesn’t really make any new drugs, all that’s left is an investment vehicle – and they’re fair game.

That won’t bother Valeant, but when an investment vehicle loses the trust of its own investors, that’s a different proposition. It raises real doubts as to how much longer it can survive in its current form. 

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