Valeant Pharmaceuticals Intl Inc (VRX) finally released its delayed 2015 annual report on Friday, just in time to meet the April 29 self-imposed deadline.
Valeant had to delay the announcement of its 2015 annual report following an internal investigation about an accounting mishap regarding its relationship with Philidor Rx Services LLC.
VRX said the investigation is now complete and that the accounting issues found don’t require a restatement (other than a wrongly booked $58 million in revenue).
In the short term, this filing from Valeant takes off the risk of violating debt covenants (debt default). While highly implausible, a further miss could see VRX stock lose a significant portion of its already-dented valuation. Investors would fear VRX could be headed for bankruptcy.
VRX stock has dropped from a one-year high $263 to the region of $33 a share. Let’s be clear, Valeant is very unlikely to go bankrupt because, if we’re talking about funds to repay debt, VRX would be able to raise it easily. After all, the pharmaceuticals company only has a principal and interest payment of $2.1 billion due in all of 2016.
And from the previous balance sheet, VRX was sitting on about $1.4 billion in cash. More so, Valeant has some big brands it can sell to liquidate most of its debt if need be. There is no bigger reason to go bankrupt than being broke and Valeant is definitely not in a cash crunch. Surely, however, it could have brought about a huge change to how Valeant is run.
In short, the fear of defaulting has been overblown.
Change Is Coming Anyway
Valeant also announced changes to its board. This comes after a recent announcement that Joseph Papa from Perrigo Company (PRGO) will take over the wheels of VRX from Michael Pearson.
Pearson, along with Valeant’s former CFO Howard Schiller and five other independent directors will cease to be on the board. The meaning of this is that there’ll most likely be a change or redefinition of strategy at the company.
Here’s the biggest pointer form management:
“The company has determined that the tone at the top of the organization, with its performance-based environment, in which challenging targets were set and achieving those targets was a key performance expectation, may have been a contributing factor resulting in the company’s improper revenue recognition.”
This comes from the ongoing investigations that Valeant is undergoing from a number of regulators, including the SEC and the Justice Department, in regards to its drug pricing.
In the long run, Valeant might face some sort of rules that would cap its drug pricing ability.
If and when that happens, some of Valeant’s drugs will not be as profitable as they’ve been. The new management will have to reassess which business segments are core to its business model and strategy, cutting loose the non-core ones.
While the 10-K filing would help VRX stock stay afloat for some time, investors should know that Valeant faces a long road to recovery.
The dip could be a buying opportunity, if the new management makes the right moves. So until I hear what’s going to happen at Valeant going forward, I’d steer clear VRX stock.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
