Valeant investors, shocked by lightweight guidance, aren't buying CEO Pearson's recovery plans

Tuesday, Valeant ($VRX) investors finally got the revised full-year and first-quarter 2016 guidance they'd been waiting for. But the numbers weren't pretty--and cost cuts and sell-offs are on the horizon to make up for it.

For the year, the Canadian drugmaker now expects just $11 billion to $11.2 billion in revenue--down from the $12.5 to $12.7 billion forecast it made in December and subsequently yanked. Adjusted EPS will come in between $9.50 and $10.50, significantly below the $13.25 to $13.75 it earlier predicted, and adjusted EBITDA will fall between $5.6 and $5.8 billion, missing the $6.9 to $7.1 billion range.

Valeant listed several reasons for the changes--none of which seemed to please investors, who sent shares plummeting by more than 40%. Sales have taken a beating in several businesses--including women's health and prescription ophthalmology--and inventory destocking has taken a recent toll on the company's dermatology and GI units. Those factors, along with "management transition issues and continued organizational distractions," helped knock Valeant's first-quarter guidance down to $2.3 to $2.4 billion in revenue from $2.8 to $3.1 billion, and $1.30 to $1.55 in adjusted EPS from $2.35 to $2.55.

Valeant has been suffering on multiple fronts since government scrutiny and channel-stuffing allegations forced it to nix nearly all of its planned price increases for the year and cut ties with a key specialty pharmacy partner. And its major effort to right the ship--a pricing and distribution pact with Walgreens ($WBA)--has angered some payers, spurring them to freeze out some of Valeant's most important--and expensive--products.

Valeant CEO J. Michael Pearson

But J. Michael Pearson, newly returned--after some boardroom squabbling--to the CEO's chair after a two-month medical leave of absence, has some ideas about how to correct course. The company has "already taken steps to restructure a number of our underperforming businesses," he told investors on a conference call, and next up is the introduction of a "broad-based cost reduction program"--which means layoffs could be in the cards. Valeant is also "exploring divestitures of non-core assets," which he hopes will enhance the drugmaker's liquidity.

Pearson is certainly no stranger to wringing out costs and chopping jobs. In his first several years at the helm, Valeant was an M&A machine, gobbling up companies one by one and slashing costs to keep the train moving. And as far as jettisoning some "non-strategic" businesses, Pearson said talks with potential takers are already in the works.

Meanwhile, Valeant announced an unaudited $2.8 billion sales tally for last year's fourth quarter and posted adjusted earnings of $2.50 per share. But the company is in the process of restating multiple quarters' worth of earnings, including $58 million in accounting missteps related to the Philidor relationship.

Now, it'll be up to Valeant to win back shareholders' trust--something management has promised to focus on. And if it doesn't? As Pearson acknowledged on the call, Valeant's board now contains representatives from ValueAct Capital and Pershing Square Capital Management, activist investors with plenty of experience taking matters into their own hands.

"Our business is not operating on all cylinders," Pearson admitted. "But we, and I, are committed to getting it back on track."

- read the release

Special Report: The most influential people in biopharma today - 2014 - J. Michael Pearson - Valeant

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