Valeant Pharmaceuticals Intl Inc (VRX) has been having a rough year as questionable accounting tactics and concerns about ethics in the industry have weighed on the company’s stock price.
Over the past year, VRX stock has fallen more than 84%, plunging from highs above $200 to just over $30 per share. This sharp decline is sure to have piqued the interest of speculative investors and could present a lucrative opportunity for those with a strong stomach for risk.
To determine whether VRX is a good buy, it’s important to understand why Valeant declined in the first place. Like most pharmaceuticals, the company is suffering as politicians and the public alike scrutinize the entire industry.
This year’s presidential race has turned the spotlight on drug prices, and many worry that the new administration could introduce legislation that will bring down healthcare costs and hurt Big Pharma’s bottom line.
Valeant has much more to worry about than politics, however. The company’s 2016 guidance was far lower than expected, raising many eyebrows on Wall Street. VRX had originally forecast $12.6 billion in sales, but reduced that figure to between $11 and $11.2 billion during its fourth-quarter earnings call.
To make matters worse, the company also announced that it would delay its 10-K filing to conduct a review of its accounting practices. VRX found that $58 million worth of revenue from Philidor Rx Services was incorrectly reported and will be analyzing its books to look for irregularities.
VRX Stock: Is the Market Overreacting?
For speculative investors, Valeant’s 10-K filing is the holy grail. The drug company is due to file at the end of April, and if the 10-K reveals that Valeant’s books are in order, investors are likely to see a spike in the VRX stock price.
The problem with buying shares of Valeant in hopes of a spike over the next few weeks is that it is far from being a safe bet. Not only is it possible that the firm’s filing will reveal further accounting problems, but VRX may also push back its 10-K filing even further. Doing this would violate many of the company’s debt covenants, meaning that its lenders could demand immediate repayment.
In fact, Centerbridge, one of Valeant’s creditors, has already said it will call a default on the company. This gives VRX just 60 days to file its report or pay back its bonds early. Centerbridge’s decision paints a worrying picture for the pharmaceutical firm, especially if it is unable to file on time. If other creditors follow suit, Valeant will be in hot water, as the company currently has $31 billion worth of debt.
Valiant has said it still plans to file by April 29 — which would keep creditors from demanding early repayment. It is still possible that VRX’s filing will clear up worries about its accounting practices, and many believe that since Valeant itself pointed out the accounting error, the firm is doing everything it can to keep its books clean.
There is still a chance that the firm’s 10-K filing will reveal no further irregularities, making some of the company’s recent decline unfounded. In this scenario, investors who buy Valeant stock now and hold on to it until the results of the filing will be able to cash in on the market’s overreaction.
That said, if Valeant’s filing shows further accounting irregularities, or the filing is delayed, VRX is likely to tumble further.
The news about Centerbridge confirms that Valeant’s creditors aren’t planning to give the drug company a break should it need more time, adding an additional layer of risk to a VRX position. At the moment, only those with access to Valeant’s accounting records are able to predict with certainty the stock’s direction, making it an extremely speculative play.
What About a Long Position in Valeant?
For investors considering a long-term investment, the water is much murkier. Not only are the results of Valeant’s 10-K filing uncertain, but the company’s overall future outlook is unclear. Even if Valeant’s accounting woes turn out to be overdone, the company still has to contend with questions about how its business is run and new legislation that could hurt its bottom line.
Valeant makes money by acquiring smaller drug companies, revamping their marketing, cutting costs and selling their products at a premium. While this strategy has made big bucks for VRX and its shareholders, lawmakers question the ethics of buying drug companies and jacking up prices for treatments.
In the coming year, many expect to see the pharmaceutical industry undergo some major reforms that will fine companies like Valeant for making such deals. While the company’s current share price may seem like a good entry point for a long position, it would be risky to bet on VRX’s future with so many unknowns.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.