Valeant files overdue financial report, ending debt default, but its troubles aren’t over

Valeant Pharmaceuticals International Inc. resolved its default on some of its $30 billion in debt by filing its long-overdue U.S. financial report for 2015 on Friday. The badly tarnished Canadian drugmaker also announced a slate of mostly new nominees for elections to its board in June.

The moves briefly nudged up Valeant’s battered shares, but the stock quickly headed south amid a broader market sell-off and the realization that the former Wall Street darling’s future is still in question.

The report didn’t reveal major new issues with Valeant’s “unethical” accounting practices, but the new board and executives will face so many problems that investors would be better off putting money into major drugmakers or other healthcare sectors, said Les Funtleyder, healthcare portfolio manager at E Squared Asset Management.

“They’re being investigated by everybody under the sun,” Funtleyder said. “That’s going to distract the company for a year at least. That’s assuming they don’t find anything.”

Agreements with its note and bondholders required Valeant to file its annual financial report with the U.S. Securities and Exchange Commission in March. When it didn’t, some debt holders declared Valeant in default and wrung higher interest rates out of the company. Further delay could have led debt holders to demand faster repayment.

Preventing that was crucial, but it amounts to successfully knocking out one mole in a months-long Whack-a-Mole game with no end in sight.

Valeant is dealing with three federal investigations into its accounting and business practices, a huge stock-price plunge and insurers demanding bigger discounts from its inflated drug prices. Just Wednesday, several current and former Valeant officials, grilled by Congress over Valeant’s strategy of buying up older medicines with limited competition and then jacking up their prices many times above prior levels, were forced to apologize. Democratic and Republican presidential candidates have blasted Valeant’s strategy and vowed to rein in pharmaceutical companies.

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Activist investor Bill Ackman and his Pershing Square Capital Management, one of Valeant’s largest shareholders, are attempting a turnaround. The fund recently took over two positions on Valeant’s board, which is replacing J. Michael Pearson, the chief executive behind Valeant’s run of serial acquisitions and staggering drug price hikes. That strategy made Valeant a symbol of pharmaceutical company greed and drove its debt to three times its current annual revenue, forcing it to look at which assets it can sell to reduce debt.

On Friday, the company announced a slate of 11 nominees to Valeant’s board, including current member Ackman and incoming CEO Joseph C. Papa, the chairman and CEO of drugmaker Perrigo Co. Papa takes over in early May, and the elections are set for an annual meeting on June 14.

“The big questions are whether a new CEO and a few new board members are enough to create trust in a company that has been so publicly disgraced and whether the company can create and execute a business model that will make it a legitimate and profitable player in pharmaceuticals,” said Erik Gordon, an analyst and professor at University of Michigan’s Ross School of Business.

Valeant executives have constrained future growth by pledging an end to the exorbitant drug price hikes that helped drive its share price from $35 in October 2011 to nearly $264 last August. On Friday, Valeant shares sank 5.4% to close at $33.36.

Valeant’s financial report filings with the SEC include restatements of results for several quarters and confirm that the Laval, Canada-based drugmaker was aggressive in stating revenue prematurely. The company noted management determined that internal control over financial reporting wasn’t effective.

The filings included restatements involving two of Valeant’s key brand-name drugs in 2015’s fourth quarter.

Valeant reduced by $16 million sales of Addyi, the first pill for boosting female libido, and will now record Addyi revenue when the drug is sold to patients, rather than delivered to wholesalers. It reduced by about $5 million sales of antibiotic Xifaxan, due to estimated returns by wholesalers.

Those changes echo the earlier misstatements that led to government probes and Valeant establishing a temporary committee, now being disbanded, to review its financial reports and accounting practices.

Valeant disclosed months ago that it improperly reported about $58 million in revenue late in 2014, by recording sales when medicines were delivered to its former partner, now-defunct mail-order pharmacy Philidor, rather than when patients received those medicines. Valeant cut ties with Philidor last fall amid allegations that Philidor created a network of “phantom pharmacies” to steer pharmacy benefit managers toward Valeant’s more-expensive drugs over cheaper alternatives.

Valeant’s corrected 2015 financial report states that it had a net loss of $291.7 million, versus net income of $880.7 million in 2014. Revenue totaled $10.45 billion, up 27% from a restated $8.21 billion in 2014.

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