With the dust from a raucous past eight months — most of it bearish — for Valeant Pharmaceuticals Intl Inc (VRX) finally starting to settle, current and would-be owners of Valeant stock have some major decisions to make.
Namely, traders will soon need to decide if VRX shares have been beaten down to a worst-case scenario price, or if the company’s technical default on its loans are a sign that something much more damaging is already festering.
Adding to the uncertainty is this morning’s confirmation that Joe Papa — former CEO of Perrigo Company plc (PRGO) — has been named Valeant CEO. While the company undeniably needed to be shaken up in a big way, there’s no real assurance that bringing in an outsider will facilitate the necessary turnaround.
One thing is for sure, though: The next few months are going to be plenty interesting for anyone paying attention to Valeant stock.
Joe Papa Named Valeant CEO
Credit has to be given where it’s due — Joe Papa’s got the chops. He was named CEO of Perrigo in 2006, and under his leadership PRGO grew the annual top line from $1.37 billion to last year’s $4.6 billion. He also was president of Watson Pharmaceuticals, and for 14 years served as a VP of marketing with Novartis AG (ADR) (NVS).
Valeant Chairman Robert Ingram offered an official statement that indirectly addressed and acknowledged what has been perceived as a shaky moral mindset:
“(Papa) has a strong shareholder orientation, a background in science and an unmatched track record of accomplishments, highlighted by his ability to lead companies through times of transition and drive excellence across commercial, manufacturing and R&D platforms. In addition, fostering an ethical culture and creating opportunities for professional development have always been high priorities for Joe, and we look forward to Joe’s arrival at Valeant.”
Brandywine Global’s Patrick Kaser may have addressed the bigger VRX shareholder concern, though:
“You’re only going to take the job if you believe it’s a real company with real products and real cash flow. It’s a vote of confidence by a presumably intelligent person.”
Calling a spade a spade, however, Papa is taking the helm in the midst of a perfect storm that’s blowing against the value of Valeant stock.
VRX (Still) Has Plenty of Uphill Battles
Valeant warned investors a few weeks ago it was apt to happen, and sure enough, it happened. That is, its full-year SEC filing — which was originally due on March 15 — has yet to be filed. Whether that failure to file its numbers qualifies as a default on its bonds is a matter of perspective. VRX convinced enough lenders to extend its filing deadline until April 29, but the company has still received several default notices in the meantime.
Valeant eagerly points out that it actually has until late May to file its accounting statements and still satiate the majority of its debtholders. The stance pretty well misses the bigger point, though: VRX shouldn’t be in a position where it has to ask for filing extensions in the first place.
The delay has mostly been rooted in the company’s decision to evaluate its accounting policies, and possibly restate 2014’s and 2015’s results.
Perhaps more troubling than the impending (and possibly restated) numbers is the reason soon-to-be-former Valeant CEO Michael Pearson has been recently grilled by a Senate committee — and is still subject to further deposition this week — mostly on matters related to drug-price hikes put into place on pharmaceuticals acquired by Valeant.
It’s grand-standing as a prelude to what many believe will be new government regulation of drug pricing. But there’s no denying Valeant made itself an easy target for such a regulatory headwind. Papa can’t prevent that. He can only hope to contain the ill effects such measures have on the company’s bottom line.
Bottom Line for Valeant Stock
The company has a long road ahead of it, and Joe Papa is one of the best possible candidates to lead the effort. However, Papa isn’t the reason an investor would want to take a swing on Valeant stock right now.
As yours truly suggested back in early March and as Patrick Kaser reiterated today, owning VRX today is a bet on someone maximizing its portfolio in the future no matter what the future holds.
As for what the delayed filings may end up indicating, it’s likely to be a horror movie. It’s all the past, however, and it’s all (still) been priced into the stock via its 90% pullback from August’s highs.
It’s still a speculative trade, though by speculative standards — with at least the CEO question being answered — it’s not a bad bet.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.