Valeant continues to dominate the news cycle. Its price-gouging put it in the same company as Retrophin which was formerly run by “Pharma Bro” Martin Skhreli. Since ending its strategy of buying up drug companies and raising prices, Valeant’s revenue and cash flow has free fallen. The company’s $28 billion debt load is at junk levels and in my opinion, the company is insolvent by $8 billion and management has engaged in smoke and mirrors to mask that insolvency.
In the grand scheme of Valeant’s issues, an unpaid $20 million bill barely rises to the level of investor concern. However, our interest in this case goes beyond the case itself, and more to what it might suggest about the current state of Valeant’s financial controls and the use of adjusted vs. non-adjusted earnings… In other words, we do not think companies that miss making royalty payments should benefit from increased earnings in prior periods, and then also benefit currently by playing catchup with payments excluded as one-time items from adjusted results.
Valeant’s share price slid hard on the Maris report but then rebounded. The company recently settled the Depomed tete-a-tete for $13 million:
Depomed (DEPO-0.6%) has settled its litigation with Valeant Pharmaceuticals (VRX) related to $20M of unpaid royalties from the sale of extended-release metformin.
Under the terms of the settlement, Valeant will make a one-time cash payment $13M which will be transferred to royalty owner PDL BioPharma (PDLI-3.6%).
After Maris raised the issue Valeant quickly settled it. The company’s fire drills have continued since CEO Joe Papa took over the helm from previous CEO Mike Pearson.
Will It Address Its $17 Billion Impaired Goodwill?
Valeant’s most glaring weakness is its balance sheet. The company has $28 billion in debt at junk levels. It has decided to pare debt through asset sales. However, it also forgoes the cash from the divested operations. That’s problematic as it has to justify the $35 billion in goodwill/intangibles accumulated from its acquisition spree under Pearson. The Shock Exchange believes that at least $17 billion – $16 billion related to Salix and at least $1 billion related to Addyi – is impaired:
Loss of pricing power and asset sales have caused the company’s EBITDA to free fall. Since Q4 2015 Valeant’s debt has been reduced from $29.7 billion to $26.5 billion – a decline of 11%. Its run-rate EBITDA has fallen from $6.6 billion to $3.5 billion – a decline of 47%. However, its goodwill/intangibles have only declined 17% from $41.6 billion to $34.5 billion over that time frame. Under Pearson Valeant grew threw acquisitions, and the revenue and earnings momentum spurred the stock. In my opinion, the underlying math needed to justify the company’s intangibles defies logic.
Valeant paid over $1 billion for Sprout’s libido-inducing drug, Addyi. The company can’t prove the drug works or whether women even want it. It sales have been abysmal. SE believes Addyi is practically worthless. Market chatter suggests Takeda offered $10 billion for Salix. Such a sale would have triggered a $6 billion (by SE’s estimation) asset impairment charge for Valeant.
The company’s equity is only $4 billion. Impairments related to Sprout and Salix could exceed $4 billion and make Valeant insolvent. Valeant needs to address these issues on the Q3 earnings call next week or the stock could crater.
Trump And The Global Economy – October 24, 2017
We had our second installment of Trump And The Global Economy town hall in October. Professor Lance Brofman, Coconut Rob, Wuyi Jacobs (AfroBeats Radio) and Shock Exchange, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead chopped it up with hundreds of members of the Brooklyn community. The town hall is designed to give the public real information about Trump’s policies on taxes, immigration, the economy, the stock market, etc. and how they will impact the country and the community.
You guessed it, drug makers like Valeant, Celgene, Mallinckrodt, Insys, Depomed, and Allergan were the topic. We explained everything from these companies’ price-gouging to tax avoidance to insolvency to contributing to the opioid epidemic. The video is below.
