To recap Mike Pearson's first week back at Valeant Pharmaceuticals International Inc.: Last Monday, returning from a two-month sick leave, the chief executive officer cancelled his welcome-back call with analysts. The next day, he talked one-on-one with some of the analysts who'd been bullish on his embattled company. Soon, those analysts were spreading word to their clients: Pearson was getting up to speed and taking care of business.
The reassurances appeared to cheer investors. One of those analysts called a web chat for 2 p.m. Tuesday, March 1, to tell his clients what he'd learned from Pearson. In the next hour, Valeant shares rose more than 8 per cent.
That chain of events troubles some investors, analysts and securities experts. Pearson, who returned to work vowing to set the right tone and champion transparency, had chosen to take his message not to the public, but first to hand-picked analysts. The perception of selective disclosure is one he may wish to avoid as he races to shore up his firm and its image, these people said.
"For a company that is in enough hot water, I don't understand why he would do that," said David Amsellem, a Piper Jaffray analyst. Amsellem, who has had a "neutral" rating on Valeant for four years, said he didn't seek and wasn't offered a one-on-one with Pearson.
Spirit of Reg FD
Valeant says it didn't improperly divulge material financial details in the calls and followed disclosure rules. But it's possible, several securities experts said, that the one-on-one discussions may not have been in keeping with the spirit of the U.S. Securities and Exchange Commission's Regulation Fair Disclosure, adopted in 2000. Regulation FD prohibits companies from selectively disclosing information that is material – something that a reasonable shareholder would consider important in making an investment decision.
The mere fact that Valeant's shares jumped after analysts began speaking about the Pearson chats isn't proof that the company may have shared material information with them, according to Lynn Turner, a former chief accountant at the SEC who is now a managing director at a legal consulting firm. Nor, Turner said, are the events on their face enough to spur a formal investigation.
Even so, he added, the situation could prompt the U.S. regulator to do some preliminary fact-finding.
"I would want to see the notes. I'd want to talk to a couple of the analysts, and who the analysts spoke to," said Turner. "The SEC will consider all those things and decide – was the CEO discussing information that did, in fact, cause the analysts and investors to act on it? And if that's the case, that would probably be material information."
The SEC declined to comment, through spokesman John Nester.
Corporate executives hold one-on-one chats with analysts frequently, of course. Executives are well versed in which information – for example, nonpublic financial results or planned deals – would be out of bounds. Valeant says it is well aware of the rules and was fully compliant.
"Like many public companies, Valeant engages in dialogue with investors and equity research analysts. In engaging in such dialogue, Valeant's officers are cognizant of obligations under Regulation FD, and it is the company's policy not to selectively disclose material non-public information," the company said in a statement. The calls complied with company policy and a senior investor relations officer was also on the line, it said.
In Valeant's case, shares have been particularly volatile – – with much of the action in the downward direction in recent months as short sellers and investors have questioned its business model.
The recent whipsaw week started on Sunday, Feb. 28, with Pearson's surprise return to the Laval, Que.-based company, which has said he was recovering from severe pneumonia.
"I realize that recent events are disappointing to everyone and it is my responsibility to set the appropriate tone for the organization," Pearson said in a statement that day. "My immediate priority will be to build stronger relationships with important constituents, such as managed care and other channel partners, regulators and government representatives, while improving Valeant's reporting procedures, internal controls and transparency."
The same Sunday, Valeant cancelled a call scheduled for the next morning to announce its fourth-quarter results. It also withdrew its financial forecasts. The news sent the shares down 10 per cent. Come Monday, the company scheduled and then scrappeda call with sell-side analysts. It also acknowledged it is under a previously undisclosed SEC investigation. Shares fell 18 per cent by day's end.
Valeant's shares started turning up on Tuesday, March 1, at around 2 p.m. That was also when one of the analysts who had held one-on-one chats with Pearson – Umer Raffat of Evercore ISI, who has a $200 price target on Valeant – scheduled a web talk to convey his impressions from his talk with Pearson.
At the time, Valeant's stock was down roughly $4 for the day, at $61.57. Over the next hour, it climbed 8.6 per cent.
Raffat's talk wasn't public. It wasn't clear what, if anything, Raffat may have said to turn shares around.
In an interview, Raffat said Pearson hadn't discussed guidance numbers. Based on the CEO's overviews of situations with certain drugs and foreign-exchange issues, Raffat said he determined there wouldn't be "wholesale" changes to guidance. He said he didn't have a transcript of his remarks. Evercore declined to comment.
No Big Surprises
Other analysts would release impressions from their own talks starting about an hour later. Two others who spoke with Pearson reaffirmed their "buy" ratings on the shares, saying the company's 2016 earnings may come down a bit but that there weren't big surprises lurking.
UBS's Marc Goodman, in a note to clients, said Pearson will need "some time to get his arms back around the business," and that he's focusing on filing 2015 annual reports and providing updated 2016 guidance. Investors are "likely prepared" for guidance to come down given Valeant's known challenges, Goodman wrote on March 1. He affirmed his $213 target on the shares, the highest of 26 analysts tracked by Bloomberg.
Shibani Malhotra, a Nomura Securities analyst with a $175 price target on Valeant, acknowledged investor frustration with the drumbeat of bad news about the company but said the talk with Pearson gave her "increased comfort" in the firm's buy rating.
"The rationale behind the guidance withdrawal yesterday was simply related to the fact that this was Pearson's first day back at Valeant and he needs time to understand business performance," Malhotra wrote on March 1.
Goodman and Malhotra didn't immediately return requests for comment. UBS and Nomura declined to comment.
Taking Pearson's Measure
The analysts who talked to Pearson may have had access to a valuable piece of information unrelated to the company's financials, according to S.P. Kothari, an accounting professor at MIT Sloan School of Management and a former head of equity research at Barclays Global Investors. The analysts, he said, were offered a rare early chance to take measure of the voice, tone and outlook of a CEO who spent two months completely out of public view.
With Valeant under incredible scrutiny over that period, understanding the returning CEO is of central importance to the stock, Kothari said.
"These are issues that are not a storm in a teacup. This is a real storm, and whether or not the CEO is prepared to combat all these issues and navigate the ship through these turbulent waters is clearly of importance," Kothari said. "To the extent that there is communication about the preparedness of the CEO, I think that would qualify, at least potentially, as material."