Tags: Bill Ackman | Valeant | pharmaceuticals | drugmaker

With Ackman Out, Valeant Confronts Rocky Road to Revival

With Ackman Out, Valeant Confronts Rocky Road to Revival
(Source: Valeant)

Monday, 20 March 2017 06:26 PM

Turning around Valeant was never going to be easy.

But the clock is ticking for Joe Papa, the chief executive of the struggling drug company.

Even before Valeant Pharmaceuticals International Inc. lost its most vocal cheerleader last week, with the exit of hedge-fund mogul Bill Ackman, Wall Street analysts were virtually unanimous: the company’s old business model is broken. Growth, if there is any, will come slowly.

And so Papa is running hard just to stand still. Since his arrival last year, following the departure of Valeant’s controversial architect, Mike Pearson, Papa has moved to stabilize Valeant’s shaky finances. Most crucially, he has refinanced $6 billion of debt, pushing off a reckoning until 2020.

Yet despite that headway, as well as hopes for several drugs, the odds are that Valeant will at best muddle along, analysts say. No one is predicting its stock, which closed Monday at $10.64, will ever revisit the heady heights of 2015, when it was north of $260.

Not even news Thursday that longtime holder ValueAct Capital Management added 3 million shares to its existing stake was enough to sustain a rally in the shares. A spike in after-hours trading was short-lived.

Irina Koffler, an analyst at Mizuho Securities, captures the prevailing view. No single catalyst is likely to trigger a precipitous decline in Valeant’s shares, she said. But a lot of little things may keep eating away at it. Ackman’s decision to sell his Valeant stock, which was announced last week, is one example. With his exit, other prominent investors might be tempted to sell, too.

Less Money, More Problems

On top of that, Valeant’s legal costs could swell. State and federal authorities have been looking into Valeant’s aggressive drug pricing and its now-ended relationship with a mail-order pharmacy. And Ackman and Valeant are defendants in a class-action suit alleging that the billionaire investor built a stake in Allergan Inc. based on insider knowledge that Valeant would bid for the drugmaker and potentially spark a bidding war.
“There’s always something with them,” Koffler said of Valeant, “but without the counteracting positive force of growth.”

Pearson turned Valeant into a hedge-fund darling by acquiring other drugmakers, cutting costs and driving up product prices. That strategy long ago imploded. Lately, Papa has pointed to a new drug for psoriasis and a promised turnaround for a key gastrointestinal drug, as well as added investments in Bausch + Lomb. But investors have largely shrugged, and Valeant stock is bumping along an almost eight-year low. Even now, only three out of 22 analyst recommendations compiled by Bloomberg are “buys.”

Debt Pile

The company also owes about $30 billion to creditors, and has had to focus on paying down that sum instead of investing in growth.

“They are going to be chopping wood on the debt for a while,” said Ken Monaghan, a portfolio manager at Amundi Smith Breeden LLC, which oversees about $11 billion in assets. “We aren’t expecting this to return to a growth trajectory any time in the near future.”

Valeant said in February that it expected company-wide sales to keep falling this year. While Papa has talked up Xifaxan, the gastrointestinal drug that is the company’s best seller, the other big hope, the psoriasis drug, comes with a “black box warning” that suicidal thoughts have occurred in patients taking the drug. That could make it a tough sell against competitors.

Papa declined to be interviewed for this story. In a statement to Bloomberg, he said Valeant has made significant progress stabilizing its business.

“We have a lot of work to do, and success won’t come overnight,” Papa said. “But we’re going to continue operating in an efficient, strategic and transparent fashion.”

Valeant has about $542 million in cash. It has yet to set aside money to cover potential legal costs and fines, which analysts say could ultimately run into the billions. Companies are often loath to set up such legal funds because doing so might suggest they’ve done something wrong.

“I can’t really criticize Joe and the leadership team for not doing the right things,” Prakash Gowd, an analyst at CIBC Capital Markets, said of Papa and his management. “I think they’re doing their best, but they have unfortunately not a very attractive set of cards to play with.”

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Turning around Valeant was never going to be easy.But the clock is ticking for Joe Papa, the chief executive of the struggling drug company.Even before Valeant Pharmaceuticals International Inc. lost its most vocal cheerleader last week, with the exit of hedge-fund mogul...
Bill Ackman, Valeant, pharmaceuticals, drugmaker
Monday, 20 March 2017 06:26 PM
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