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Black hole

15 March 2016 By Robert Cyran

Valeant Pharmaceuticals is playing chicken with a death spiral. The company’s failure to file audited results has started a countdown to default that vaporized over 40 percent of its market value in early trading. Executives are mulling selling assets. But with so many questions about its financials unanswered, Valeant’s outlook is bleak.

It’s never good when the conversation on a company’s earnings conference call focuses on its liquidity and ability to meet debt obligations. The now $12.5 billion company has about $30 billion of debt, thanks to a string of acquisitions; with over $1 billion of cash on hand executives argue it can meet its remaining scheduled debt and interest payments this year.

That becomes irrelevant if it cannot produce audited results within 60 days, as investors can then demand Valeant repay a chunk of its debt. The company says it’s trying to file as fast as it can.

There are more than a few other discordant notes, however. The bullish case for Valeant always centered on its ability to throw off lots of cash. Yet that’s shrinking. Chief Executive Michael Pearson, back in charge after a couple of months of sick leave, now thinks it will produce about $5.7 billion of adjusted EBITDA this year, almost a fifth lower than its previous estimate. Moreover, while the company wants to patch up its balance sheet, it now thinks it will only pay down about $1.7 billion of debt this year, compared to its previous estimate of more than $2 billion, and had already drawn down $1.5 billion on its revolver by the end of December – about double what it had tapped just three months earlier.

Investors were already skeptical about Valeant’s adjustments to the financial figures it trumpeted. They are more so today. Valeant press release stated that adjusted EBITDA for the next four quarters would be around $6.2 billion to $6.6 billion. On the conference call, though, Pearson had to admit the company only expects around $6 billion and had to defend himself against an analyst’s accusation that the company had deliberately puffed up the numbers.

Valeant’s old M&A business model is dead, customers are demanding big price cuts or not reimbursing various medicines and the company can’t file audited financial statements. It’s now impossible for an outsider to know exactly what is happening within the company – or if it can avoid falling to its doom.


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