VRX lost half of its value on Tuesday, but it shouldn’t be too surprising why. Back on Aug. 20, yours truly here warned investors that Valeant Pharmaceuticals Intl Inc (VRX) was taking on more debt than it could feasibly handle, over-leveraging itself in the name of growth.
Valeant bought Sprout, the maker of the so-called female Viagra, but also made three more sizable deals in the months leading up to the Sprout deal.
Many of its recent purchases, however, weren’t bearing their full (if any) revenue to service those underlying loans, priming Valeant stock for a pullback.
It’s fallen 85% since that day. You’re welcome. I’m not revisiting my call on Valeant just to gloat (okay, I’m probably gloating a little), but because there’s a lesson to be learned from this train wreck. And it’s not necessarily the one you think it is.
Valeant Stock: Camelot Is Crumbling
On the off chance you’re reading this and haven’t heard, pharmaceutical company Valeant posted its fourth-quarter numbers on Tuesday morning, revising its 2016 revenue expectations from a previous range between $12.5 billion to $12.7 billion down to $11 billion to $11.2 billion.
The news didn’t go over all that well, nor did an EBITDA outlook of between $200 million and $600 million less than previously forecasted. The company also warned it may default on its $30 billion debt. (Investors should know that the default is a technical one rather than one rooted in an inability to make interest payments.) The loan covenant requires Valeant to submit its SEC filings on time, which it didn’t.
That technicality was of little importance to traders on Tuesday, however, as Valeant stock plummeted more than 50% in one session.
What gives?
Long story made short, the company’s drug portfolio isn’t living up to the expectations the organization was touting when it was buying up all those smaller players. Particularly dermatology, gastrointestinal and women’s health drugs.
It happens. But it shouldn’t. Valeant doubled its long-term debt load in the past year, from $15 billion to $30 billion, to pay off acquisitions that should’ve fared better.
The end result? VRX paid $420 million in interest expenses in the most recent quarter, translating into an annualized expense of $1.68 billion. For perspective, that’s more than 10% of the $10 billion worth of revenue Valeant’s generated over the past four reported quarters, and more than twice the net income of $605 million it’s generated during the same timeframe.
It begs the question — how’d that buying spree everybody was cheering last year work out for ya, Valeant?
Clearly, those purchases aren’t quite paying for themselves. At least, not yet.
Lesson(s) Learned
Valeant indirectly alluded to political and social headwinds aimed at specialty drugs as the culprit for the lowered guidance. And to a small degree that may have something to do with it.
Mostly though, Bill Ackman’s overbaked assumptions led Valeant Pharmaceuticals to bite off more than it could chew, and nobody thought to put a stop to it.
That’s not one of the lessons to remember, however. Rather, these are two takeaways everyone should bear in mind.
First and foremost, the biggest and best cure for high prices are cost-effective alternatives.
Simply put, the aggressive price hikes Valeant thought it could get away with backfired — it’s struggling to sell all those recently acquired drugs at frothy prices because caregivers, patients and payers are buying lower-priced generics.
It should come as no real surprise. Within the past decade, gold, oil, rare earth metals, solar panels and real estate all reached prices that ultimately led to a countermove that was just as harsh. The market always eventually finds a way to find balance. It was naive of Valeant to think it would be able to command painfully high drug prices indefinitely.
The other (and lesser) lesson: Just because a company and its key shareholders say an acquisition — or acquisitions — are worth paying a premium for, taking on massive debt to make it happen, doesn’t mean those companies or vested institutions are right.
That’s the gentle way of saying Valeant let egos get the better of it.
Bottom Line for Valeant Stock
The irony is, VRX stock still has value in its portfolio and pipeline. In fact, it may well be worth buying some now in the middle of this carnage.
While it overpaid for its recent acquisitions, Valeant stock’s tumble since August offsets the impact of those expensive deals.
And as for its bonds, again, it’s not that the company can’t make payments; the impending default is only a semantic one stemming from the company’s inability to file its quarterly report on time.
Whatever the case, it could take years for the company to dig itself all the way out of its debt hole it’s in, and it could take months just for all the legal and publicity dust to settle. Anyone wading into Valeant stock here should view it as a long-term, speculative holding.
And don’t forget those two important lessons if you didn’t pick them up from my August commentary. This could all happen again in the future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
