Tuesday is a make-it-or-break-it day for Valeant Pharmaceuticals (NYSE:VRX). It’s the day the company, whose shares have dropped nearly 75 percent since August 2015, reports results from a tumultuous 2015.
It’s not the day the troubled drugmaker originally picked to inform shareholders of its financial performance. Amid news of a new federal securities investigation, a possible ratings downgrade and persistent revenue-recognition issues, Valeant rescheduled its earnings call — much to the consternation of investors.
But shareholders, including high-profile hedge-fund manager Bill Ackman, hope that the long-awaited earnings day will mark a turning point for the troubled pharmaceutical giant. “We expect that much of the uncertainty will be resolved in the relative short term, hopefully over the next few or so weeks,” Ackman told CNBC earlier this month.
Here are four questions to keep in mind as Valeant reports its 2015 results at 8 a.m. EDT.
1. Pearson: Back In the Driver’s Seat
The meeting marks Chief Executive Michael Pearson’s return to the top of Valeant after a two-month medical leave. Though Pearson is said to be fully recovered, Valeant’s stock is not — persistent questions over the viability of the drugmaker’s pricing model and sales strategies have met with no simple answer from company management.
But Pearson, a former McKinsey consultant and CEO of Valeant since 2008, has earned plaudits on Wall Street. As he returns with a reshuffled board of directors, Pearson’s main challenge will be maintaining investors’ trust as he tries to right a wayward ship.
“I realize that recent events are disappointing to everyone, and it is my responsibility to set the appropriate tone for the organization,” Pearson said upon his return last month. Analysts surveyed by Reuters expect the company to report $10.5 billion in earnings for 2015, with earnings per share of $10.74.
2. Specialty Revenue: Sideshow, or Main Event?
The event that touched off Valeant’s recent woes was the unraveling of Philidor RX, a specialty pharmacy tightly entwined with Valeant whose questionable sales practices, once disclosed, raised the hackles of investors and insurance partners alike.
To Citron Research, a short seller whose bombastic October report shook investors deeply, the discovery of the shadowy Philidor could have made Valeant “the pharmaceutical Enron.” Although that claim proved fanciful, even Ackman began to speculate that Philidor's numbers were “exaggerated,” and the company has since restated two years of earnings because of improper booking of sales through Philidor.
But investors wondered how much revenue was flowing through the now-shuttered Philidor and similar specialty channels that sidestep traditional pharmacies.
In late 2015, Valeant said sales at Philidor, then Valeant’s largest specialty partner, amounted to around 7 percent of revenue. But the company had been planning to expand Philidor’s operations significantly, and specialty pharmacies — which manage customer orders and reimbursements outside of traditional outlets like CVS — were becoming central to Valeant’s business model.
Though Valeant has struck a deal with Walgreens to distribute products formerly handled by Philidor, investors remain skeptical that the company will pivot from a strategy reliant on specialty pharmacies to a more conventional route.
3. Revenue Growth: Organic or Engineered?
The specialty pharmacy flap has shed light on another question: How much of Valeant’s meteoric growth was rooted in increased demand and not just skyrocketing prices? Part of the purpose of using specialty pharmacies was apparently to finagle insurers into paying for high-priced drugs when cheaper generics might be available.
With specialty channels curtailed, Valeant’s habit of rapid price increases — averaging 66 percent for name-brand drugs, according to Deutsche Bank — appears less tenable. So how much did big price hikes on newly acquired drugs add to Valeant’s profits?
Asked in April 2015, Pearson told investors that “volume was greater than price in terms of our growth outside the United States,” adding, “In the U.S., it’s shifting more to volume than price.”
But documents released by a congressional committee last month suggest the opposite. In an email sent shortly after Pearson’s comments, Chief Financial Officer Howard Schiller wrote that price increases accounted for 60 percent of revenue growth, excluding hikes stemming from the purchase of rival Marathon Pharmaceuticals. “If you include [M]arathon, price represents about 80%,” Schiller added.
Such inconsistencies have troubled investors. In February Wells Fargo analyst David Maris sent Valeant shares tumbling on a report questioning the durability of the price hikes, among other facets of Valeant’s business.
Valeant's business model hinged on “low-cost debt for deals, cost-cutting for acquired companies, price increases and based on recent press reports, specialty pharmacy practices that are now under scrutiny,” Maris wrote. “Can Valeant adapt to the new environment? We are not sure.”
4. Debt, Debt and More Debt
Hanging over all of this is Valeant’s spectacular $31 billion tower of debt, accrued during the course of Valeant’s streak of big-name mergers and acquisitions. Last month, Moody’s placed the debt on watch for a downward ratings move, citing disappointing earnings.
Questions over that debt have attained central importance in board-level wrangling. Following entreaties from Ackman, Valeant has added three new board members, including the vice chairman of Ackman’s Pershing Square Capital Management.
Ackman pushed for Valeant to sell portions of its eyecare subsidiary Bausch & Lomb, which it acquired in 2013, to help pay down its debt. The company, however, has not been willing to entertain the notion.