Valeant Pharmaceuticals International Inc. posted a steep loss in the third quarter and slashed its 2016 earnings forecasts, prompting scathing reviews from analysts and sending its share price tumbling on Tuesday.
The Laval, Que.-based drug maker recorded a $1.2-billion (U.S.) loss in the three months ended Sept. 30, a stark contrast to the $50-million it generated in income during the same period last year.
Valeant took a $1-billion writedown on the value of certain U.S. businesses, attributing most of the charge to its Salix division. It acquired Salix, the maker of drugs for treating stomach disorders, just 19 months ago for $10.9-billion and confirmed last week that it is already in talks to sell the company.
Shares of Valeant plunged 22 per cent Tuesday in New York after the company also warned that its revenue and adjusted earnings would fall in 2017. So far this year, the stock has lost about 85 per cent of its value.
Once Canada’s largest company by market value, Valeant has been in free-fall ever since it came under close scrutiny from shareholders and regulators in 2015 and had to abandon its once wildly successful strategy of expanding through acquisitions and drug price increases. An executive team with many fresh faces has been on a mission to remake the troubled company by better managing its roster of drugs, restoring trust and getting its financial house in order.
Now, investors are finding out that Valeant won’t be rebuilt overnight. In fact, things might get worse before they get better.
Paul Herendeen, who joined Valeant as its chief financial officer in August, said Tuesday during a lengthy earnings call with analysts that 2017 “will be a down year” for revenue and adjusted earnings, but would not provide detailed guidance on his estimates.
“We will dig our way out of part of the growth hole … but we will not crawl all the way out of that hole,” he said.
Valeant revised its adjusted earnings forecast for 2016 to a profit of between $5.30 and $5.50 a share from a previous estimate of $6.60 to $7.
Mr. Herendeen expressed some doubts about the quality of the earnings guidance, however, saying he is still learning about the company’s businesses. He said he would have “more confidence” in the guidance in a few months, particularly when the company offers its detailed forecast for 2017.
“There could still be some surprises yet to be discovered,” he said. “I’m not trying to alarm anyone or walk away from our revised guidance. I’m just letting you know that as time passes, our confidence in our forecasts and our guidance will improve.”
While he said Valeant’s generic drug division and some of its neurology drugs will face fiercer competition in 2017, the remainder of Valeant’s businesses “is expected to be healthy” with revenue climbing by “mid-single digits.”
Analyst David Amsellem of Piper Jaffray called Valeant “not investable” in a research note Tuesday, saying he had not considered the company’s previous earnings guidance as credible and said management has not been “fully transparent” in the past about its business challenges.
David Maris of Wells Fargo Securities said in a report that Valeant’s shares “carry too much risk for us to be comfortable recommending them,” but BMO Nesbitt Burns analyst Gary Nachman maintained a “market perform” rating on the shares because “it will take time to see how [Valeant] executes even with the bar lowered.”
The company has more than $30-billion in debt weighing on its books. It is committed to using the “vast majority” of its free cash flow to pay down its debt, having repaid another $450-million since its second quarter. It expects to reduce its debt load by more than $5-billion by early 2018 from its cash flows and the sale of non-core assets.
But Valeant said it can get by without those divestitures.
“We do not need to sell assets to be okay from a liquidity perspective,” Mr. Herendeen said. “We will certainly pursue that if it makes sense.”
Moody’s Investors Service downgraded its ratings on some of Valeant’s debt Tuesday, citing challenges turning around the business and its high leverage ratio. But S&P Global Ratings did not change its outlook despite the fact Valeant “faces a multitude of challenges” because it has signalled its willingness to sell assets, which “likely” exceed the value of its debt.
Mr. Maris at Wells Fargo said he remains concerned about Valeant’s declining cash flow from operations, which fell by $163-million in the third quarter compared with a year earlier.
“We do not quite understand how a business that spent more than $15-billion to acquire assets experiences deteriorating cash generation,” he said in a research report.
Mr. Maris also noted that Valeant did not take an impairment charge for its Addyi female libido drug, “but we continue to believe the value of Addyi is significantly impaired.”Report Typo/Error