You'd think Valeant Pharmaceuticals ($VRX) would abandon its sugar-coating strategy and just tell it like it is. CEO J. Michael Pearson promised earlier this month that no other shoes would drop, and boy, did they drop yesterday, with terrible 2016 guidance, a technical default on billions in debt--et cetera. Yet as VRX plummeted, Pearson was using the same "we'll fix it" language he's used since his company caught the spotlight last year.
|Valeant CEO J. Michael Pearson|
You'd think someone on staff would carefully proofread a financial announcement they knew would be examined with an electron microscope. But no: Valeant sent out a press release with a $600 million mistake. Its earnings expectations for the next four quarters is $6 billion, not $6.6 billion as the release said. That fumble intensified the impression that management can't handle the job.
Naturally, we're getting a Victoria Falls-sized outpouring of Valeant criticism, prognostication, and yes, defense. Here's what's worth checking out.
First, the conference call to explain that disastrous guidance. "Our business is not operating on all cylinders, but we are committed to getting it back on track," Pearson said, true to form, and analysts followed up with a barrage of pointed questions. Why has so much of the business gone bad so quickly? Is Pearson still fit to lead the company? Why should analysts trust him now when he's been less than transparent before? And one pointed out the $600 million typo. (Transcript)
Erik Gordon, a professor and pharma analyst at the University of Michigan's business school, said the call was disastrous. "It's kind of the Inspector Clouseau school of management," Gordon told the Associated Press. "This is a fabulous example of getting everything wrong" when you're trying to reassure investors. (Article)
That typo? Evidence that management doesn't have its act together, one money manager told Bloomberg. "There are too many weird things happening here," according to Matthew Duch of Calvert Investments. "There were typos. That just shows the lack of controls, the lack of detail. And if it's happening at these levels, where does it end? You want to be an investor, not a gambler." (Story)
Another fund manager suggested a management shakeup. "The market would be well served to see material management change soon," Gary Herbert of Brandywine Global Investment Management, which owns some Valeant debt, told Bloomberg. Essentially, he said, "They're going from a growth company to a cigarette butt."
The bad news keeps on coming, despite assurances to the contrary, a variety of market watchers pointed out. "Every time the company convenes a call it seems that there's something new revealed that's worrisome," Piper Jaffray & Co.'s David Amsellem said. "All of this leads me to conclude that the management doesn't have a good handle on these various businesses." Analyst Steve Brozak of WBB Securities told Reuters, "There is no predicting what happens next. Valeant has had its worst day ever--so far." (Story)
Likewise, Canaccord Genuity analysts called the weak 2016 guidance "likely the last straw" for many investors--but noted that other straws could be afoot. Valeant's internal investigation into ties with the shady specialty pharmacy Philidor isn't complete. The company delayed its 10-K filing with the Securities and Exchange Commission, which could trigger a technical default on its debt.
Citron Research's Andrew Left, who's been critical of Valeant before, said the company remains a mystery. "At the end of the day, Valeant is a black box," he told CNBC. He also wondered how the company can remake itself when the market has fundamentally changed. "How are they going to make these franchises more valuable than when they acquired them without having to raise prices?" (Report)
Meanwhile, some previously upbeat analysts ate humble pie in their investor notes after Valeant's conference call on Tuesday, and one has to admire that. "I think it will be an understatement to say that this has clearly been a very humbling call for me," ISI Evercore analyst Umer Raffat wrote on Tuesday afternoon, noting his previous (exhaustive) research into allegations against the company, which had bolstered his confidence--but also pointed out that big questions remain unanswered now. He also caught the typo.
Likewise, Shibani Malhotra of Nomura--who confronted Pearson about his credibility during the call--said she'd been wrong to keep the faith before. "We admit upfront, we have been humbled by our stock call on VRX, which we have defended despite the continuing spate of bad news, as we believed that despite the noise surrounding the company, much of the fundamental businesses had been performing well," she said in a note Wednesday morning.
On the call, Valeant said it would change its approach to accounting for taxes, and that will raise its rate to 10% to 15% from its previous 5%. Why? Regulators didn't buy the previous calculations. Pearson tried to downplay the change. "[W]e've had ongoing dialogue with the SEC," Pearson said. "It has been quite productive from our perspective. We think this is an appropriate presentation."
Moody's Investors Service lowered its rating on Valeant and warned that more downgrades could come. Senior VP Michael Levesque said the company's weaker growth in some of its core areas--disclosed on Tuesday--and the risks that come with switching key product lines to Walgreens ($WBA) helped trigger the change. Last but not least, "adapting to an environment with limited opportunities to raise prices on its products"--one of its former strategies for pushing revenue growth.
In the end Pearson acknowledged that he has to win back investors. "In terms of management credibility, we have to earn it," he said. It won't be easy. And for the record, he said the same thing two weeks ago.