Short cuts and greed brought Valeant Pharmaceuticals Intl Inc (VRX) to its knees, but if Monday’s market action in VRX is any indication, the company will survive.
Valeant stock soared as much as 16% within the first hour of the trading session after the once high-flying pharma company issued some cathartic news.
First off, Valeant said it will replace CEO J. Michael Pearson, who manned the tiller while the company engaged in some dodgy accounting and loaded up on debt.
VRX also is adding billionaire hedge-fund macher Bill Ackman to the board. His Pershing Square Capital Management holds a 9% stake Valeant, so this comes as a surprise to no one.
The most interesting news, however, comes from a new regulatory filing that makes mincemeat of former CFO Howard Schiller and how his oversight of the company’s accounting practices that caused it to misstate results.
From the VRX press release:
“As previously disclosed … the company preliminarily determined that approximately $58 million in net revenue relating to sales to Philidor in the second half of 2014 should not have been recognized upon delivery of product to Philidor. … The improper conduct of the company’s former Chief Financial Officer and former Corporate Controller, which resulted in the provision of incorrect information to the Committee and the company’s auditors, contributed to the misstatement of results. In addition, as part of this assessment of internal control over financial reporting, the company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition.”
What’s Next for VRX?
So, that’s the greed part. Valeant said the effect of the misstatement on net income comes to $33 million, or 9 cents a share. That accounts for only about 1% of fiscal 2014’s EPS, so it’s hardly a disaster.
As almost an aside, Valeant asked Schiller to resign from the board, but he declined.
Valeant stock has lost about 90% since its August high, and this news dump is the best thing that could’ve happened for investors. It cleans the slate and improves VRX’s credibility with the debtholders who were increasingly convinced that Valeant would default.
Indeed, according to The Wall Street Journal, VRX’s lenders are “highly likely” to work something out with the firm.
With default fears pushed aside, Valeant stock is right to bounce back.
Where it goes from here is another matter entirely.
The company’s strategy of buying companies for their pipelines instead of spending on research and development was a shortcut that almost scuttled the balance sheet. Valeant also intends to shift away from drug-price increases. But those two tactics are Valeant.
VRX is also looking to sell assets to pay down debt — something that’s great for the balance sheet but gives Valeant even less to work with.
With the business plan in ashes and the company actually getting smaller, what’s the point of Valeant stock?
Don’t chase today’s bump.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
