Shares of Valeant Pharmaceuticals crashed Tuesday after the embattled drugmaker failed to reassure investors that it's getting back on track and even conceded for the first time that it's technically in danger of defaulting on its debt.
The company faces a smorgasbord of problems: falling sales, increased pressure to cut drug prices, massive debt, three ongoing federal probes of its accounting and pricing practices, and shareholder lawsuits in the U.S. and Canada.
Valeant Pharmaceuticals International Inc.'s already depressed shares took their biggest one-day tumble ever, falling just over 50% Tuesday after the company finally reported its overdue fourth-quarter results, which missed profit expectations. The Canadian company also slashed all its 2016 financial forecasts and said its business model, based largely on huge price hikes for its drugs, is no longer viable, given strong pushback from payers and other strains.
The turmoil led Pershing Square Capital Management — activist investor Bill Ackman's hedge fund and one of Valeant's biggest shareholders — to send its own investors a note stating it will "take a much more proactive role at the company to protect" its investment.
Pershing wrote that Valeant's businesses are "worth multiples of" the current price, but that shares won't hit that value until management regains shareholder confidence. The note added that Valeant "shocked the market" with revenue and earnings forecasts that don't seem to fit with "favorable prescription trends" or management's comments on the strength of its businesses.
Valeant Chief Executive Michael Pearson told the analysts on a lengthy conference call that an ongoing investigation of Valeant's 2014 financial reporting by an ad hoc committee it appointed means Valeant won't be able to file its annual financial report with the Securities and Exchange Commission until April at the earliest.
That would miss filing deadlines of March 16 and March 30 contained in Valeant's agreements with bondholders and creditors, respectively. If those debtors chose to declare the company in default on its debt, which totals about $30 billion, Valeant could be forced to make repayments faster and see limits on future borrowing.
Analysts were further upset when the company incorrectly said in a news release that adjusted profit for the four quarters beginning in April would be $6.2 billion to $6.6 billion. A slide included in Valeant's presentation to analysts had the correct number: $6 billion.
"It's kind of the Inspector Clouseau school of management," said Erik Gordon, a professor and pharmaceuticals analyst at University of Michigan's Ross School of Business. "This is a fabulous example of getting everything wrong" when you're trying to reassure investors.
Analyst Steve Brozak, president of WBB Securities, likewise said the gaffe raised questions about whether any of Valeant's statements could be trusted.
"There is no predicting what happens next," Brozak said. "Valeant has had its worst day ever — so far."
Pearson, who recently returned from a two-month medical leave, said his team can turn things around and return to growth.
"We do think we have a plan that will produce cash flow and allow paying down debt," he told analysts, adding: "In terms of management credibility, we have to earn it."
Investors, already livid that Valeant shares had plunged to about one-fourth of their $263.81 high last August, didn't buy Pearson's pitch. They sold off shares furiously, driving the price down $35.53, or 51.5%, to $33.51. Trading volume for the day exceeded 137 million shares, more than 14 times normal volume.
Valeant is facing an SEC investigation of its accounting from 2014, plus scrutiny from Congress and attorneys general in two states over its practice of buying rights to old drugs and raising their prices a few hundred percent. Valeant said it now will stick to modest or no price increases, noting demands from insurers for much bigger discounts.
The company has made some concessions to shareholders, this month adding three directors to its board, including a Pershing Square executive.
Pearson said Valeant is in confidential discussions with partners on selling some noncore assets and hopes to use that and other money this year to pay off $1.7 billion of the debt, accumulated from a spree of acquisitions in recent years.
Valeant reported preliminary, unaudited results showing it lost $336.4 million, or 98 cents a share, in the three months ended Dec. 31. Excluding one-time items, earnings were $2.50 a share, far short of the $2.64 that analysts expected.
Revenue totaled $2.79 billion, just over projections for $2.76 billion. The company said sales were down or below expectations by a total of $1.3 billion in its dermatology, gastrointestinal, ophthalmology, women's health and Western Europe businesses, among others.
Deb Jorn, the executive vice president in charge of Valeant's U.S dermatology and gastrointestinal businesses, resigned March 3.
Valeant now anticipates a first-quarter adjusted profit between $1.30 and $1.55 per share on revenue of $2.3 billion to $2.4 billion. Its prior outlook was for an adjusted profit between $2.35 and $2.55 per share on revenue of $2.8 billion to $3.1 billion.
For 2016, the company now foresees an adjusted profit between $9.50 and $10.50 per share on revenue of $11 billion to $11.2 billion. Its previous forecast was for an adjusted profit between $13.25 and $13.75 per share on revenue of $12.5 billion to $12.7 billion.
Analysts polled by FactSet expect first-quarter profit of $2.62 per share on revenue of $2.84 billion and a 2016 profit of $13.27 per share on revenue of $12.42 billion.