Valeant’s dismal fourth quarter shows its turnaround is still a distant dream

Valeant CEO Joseph Papa tried to reassure anxious investors following the company's fourth-quarter report.

Valeant’s executives did their darndest to point out the positives in the company’s fourth-quarter earnings, including modest revenue gains in its Bausch + Lomb eye segment and progress made in its plan to pay down debt and shed underperforming businesses. But they couldn’t hide from the dismal picture painted by the numbers: Valeant’s revenue fell 13% year-over-year to $2.4 billion, and its net loss skyrocketed 34% to $515 million ($1.47 per share).

Considering that year-over-year comparisons were terrible in last year’s fourth quarter, it’s no surprise analysts are predicting that Valeant is in for another difficult year.

“We think Valeant’s 2017 might be similar to its 2016,” wrote Wells Fargo analysts in a note to investors that they titled “Deja Valeant.” The note detailed a laundry list of problems the company faces, including patent expirations, weak prescription trends, deteriorating cash flow and “numerous lawsuits” that include an insider trading case.

Valeant’s 2017 guidance didn’t do much to ease investors’ concerns. The company said it expected revenue to come in between $8.90 billion and $9.10 billion, down from $9.67 billion in 2016. It said to expect non-GAAP earnings of $3.55 billion to $3.7 billion, down from $4.3 billion. Valeant's shares dropped nearly 10% to $15.12 in early morning trading.

Valeant is counting on some key product launches to propel revenue growth in the next few years, including Siliq, its psoriasis treatment that was approved by the FDA earlier this month. But the sales task will be far from easy: The FDA put a black-box warning on the product indicating a suicide risk, forcing Valeant to market the drug with an extensive risk-management program in place.

During a conference call after the earnings report, two analysts asked how the company would differentiate Siliq from competing psoriasis medicines, namely J&J’s Stelara, given the safety concerns. Valeant CEO Joseph Papa pointed to head-to-head trials of the two meds as a key selling point.

“What we are most excited about with Siliq is that it represents a significant opportunity, based on the efficacy data we have,” Papa said. “In the clinical trials we tested it against the Stelara product. So we believe that increased clinical efficacy that we saw certainly vs. Stelara is one part of the question,” adding that the competing products aren’t free of risks, either. “There’s a risk of cancer with some of the products,” he said.

Maybe so, but Wells Fargo analysts have been polling doctors to get feedback on Siliq, and the results, they wrote, are “not encouraging.”

During the earnings call, Valeant executives cited future product launches as one reason to be optimistic, but Valeant has already suffered some stumbles there. Last year, it got a dreaded complete response letter from the FDA on its eye drug Vesneo (latanoprostene bunod), citing questions about manufacturing quality. The company resubmitted its application to the FDA yesterday. Papa conceded during the call that any gains from product launches in 2017 would not come until the back half of the year.

Then there’s Valeant’s struggling stomach-drug unit Salix, which it bought for $11 billion in 2015. Rumors emerged late last year that Valeant was getting set to sell Salix to Takeda for $10 billion. That deal didn’t happen. And yesterday, the company announced it had “rapidly scaled up” its Salix salesforce by 250 reps. It’s trying to get its IBS-D drug Xifaxan and opioid-induced constipation treatment Relistor into the hands of primary care doctors. But Wells Fargo issued a note saying 50 reps left for a rival company, which Valeant didn’t deny.

The earnings call ended with a question about a topic Valeant’s executives might have preferred to ignore: the company’s crippling debt load. Investors have been pushing Valeant to refinance its debt, raising tough questions about whether it has enough liquidity to meet its repayment obligations over the long run.

CFO Paul Herendeen didn’t provide details about the company’s long-term plan, offering only this sobering assessment: “We look at the situation in the financial markets and the debt markets every day with great urgency. I look at all the towers of our debt.”