Valeant Pharmaceuticals Intl Inc (NYSE:VRX) flew too close to the sun, and it got burned. Over the past year, it has become the poster child for pharmaceutical excess, with the Philidor scandal overshadowing the hiring of Joseph Papa as its new CEO. Since the company first came under investigation in summer 2015, VRX stock has lost 90% of their value.
For the quarter ending in September, analysts expected profits of $1.78 per share on revenues of $2.49 billion. The whisper number was even lower, at $1.69 per share of Valeant stock in earnings.
The reality was much worse. VRX posted a loss of $1.218 billion, or $3.49 per share, on revenues of $2.48 billion. The reason for the loss was a decision by Papa to write down the value of Salix, bought for $13.8 billion in 2015, as it tries to sell that company for $10 billion. Even absent that, earnings came to $543 million, or $1.55 per share — well short of expectations. And Valeant says things don’t look any better going forward.
VRX stock is crashing by more than 20% heading into Tuesday’s open in response. It will likely open around $15 per share — nearly 95% below its December 2015 peak.
Valeant Protests to No Avail
Valeant insists it is no longer doing anything different from any other big drug company.
So what if it still has some artificial monopolies? So what if it still pushes prices to the sky? So what if it still exports those earnings for tax reasons? Doesn’t everyone? Seriously, the company hosts a special page on its financial website aimed at rebutting criticisms.
If the point is that everybody does it, though, Valeant has a point. Price increases — which the industry calls marketing — has replaced drug discovery as the order of the day. Tax inversions are now common. Companies like Mylan NV (NASDAQ:MYL), Allergan plc Ordinary Shares (NYSE:AGN) and Mallinkrodt plc (NYSE:MNK) long ago copied the Valeant business model, moving their profits to low-tax countries. Former Valeant CEO Michael Pearson did indeed transform his industry.
Now to satisfy creditors, who hold $30 billion in long-term debt on past acquisitions, the company is having to sell the family silver.
Salix, for instance, makes Xifaxin, a drug for irritable bowels that is the Valeant’s only “blockbuster.” And Valeant is taking a price for Salix that is 30% less than it paid just a year ago.
Valeant Can’t Stay Out of Legal Trouble
The legal hits keep coming.
The depth of Valeant’s relationship to Philidor — which bought small pharmacies and used them to push sales of brand name drugs through insurers, has now come to light. Former CEO Pearson and Howard Schiller, the CFO who briefly replaced him last year, are now under criminal investigation and Philidor executives could also be charged.
Regulators are coming after Valeant’s basic business model. The company’s effort to monopolize treatments is being fought by regulators, and it is selling Paragon Holdings to reduce its dominance of the contact lens business owned by its Bausch & Lomb unit. Its efforts to keep raising prices are being resisted.
Valeant also is being sued by investors in Sprout Pharmaceuticals, bought for $1 billion, because it failed to make a hit with Addyi, a female libido drug.
Bottom Line on VRX Stock
Valeant grew by borrowing money to buy assets, and failure to generate big profits from those assets is forcing a piecemeal sale of the company’s assets.
Valeant was once the most valuable company in Canada, with VRX stock hitting an all-time high of over $335 per share in July, 2015. It was the darling of hedge fund managers like Bill Ackman of Pershing Square, who now regrets buying into the company and found himself, in April, testifying to the U.S. Senate next to Pearson and Schiller.
The lesson to investors should be clear. If something looks too good to be true, it is, even if the smartest guys in the room back the play.
Valeant’s tale of monopoly, price hikes, and exporting of profits may have become standard operating procedure for the industry, but it is now in the process of being unwound, and whether Valeant itself can survive the process is an open question.
Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.