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How easy it was

29 Feb 2016 By Robert Cyran

Valeant’s Mike Pearson is back as chief executive – but with less power and no glory. He has been stripped of his chairmanship of the $25 billion drugmaker’s board. The company on Sunday also withdrew its earnings guidance and will further delay reporting 2015 results. Two months of convalescence may have helped Pearson’s health, but marginally better-looking governance isn’t enough to give investors like Bill Ackman much hope of reversing losses.

The reporting delay will fan fears that Valeant’s accounting has been too aggressive – and that the restatements the company has so far floated are only the beginning. Even if audited figures for last year are published soon, Pearson’s room for maneuver is shrinking.

His company’s stock has plunged more than 70 percent since last August as the acquisition machine that attracted backers like Ackman’s Pershing Square Capital Management has seized up and accounting problems have emerged. Meanwhile, Valeant has more than $30 billion of debt. The combination effectively rules out using either paper or borrowed cash to buy more.

Valeant is now eschewing substantial price increases on most drugs – another aspect of its business model that attracted controversy – and is ramping up research and development, among other expenses, which will hurt margins. The company’s previous financial guidance may now be off base because of these changes.

The last bit of bad news tucked into Sunday’s press release is a sting in the tail. Rival Actavis wants to introduce a generic version of Xifaxan, Valeant’s biggest drug with annual sales of about $1 billion this year according to analysts. Last year, Valeant paid $14.5 billion including debt for Salix Pharmaceuticals, which owned the compound. The company says patents protect it for another 14 years, but these are relatively weak and a generic alternative is likely to appear sooner. The chances of recouping the cost of buying Salix look low.

Combined, Valeant spent more than $30 billion on acquisitions. If Salix, the company’s biggest deal, is a guide it overpaid in some cases. That means Pearson will have a debt hangover to deal with. Making it over the hump will require cautious efforts for years to come to extract enough cash to repay bondholders. That’s unlikely to give stock investors much to get excited about.


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