Valeant missed huge on its 'billion dollar' saviour drug -- that should raise a big red flag

There was a lot of weirdness on the conference call that Valeant Pharmaceuticals held on Tuesday.
Analysts were combative, and there was some confusion about how much cash the company’s holding. It was all made worse by a typo that — once fixed — wiped as much as $600 million off of the company’s outlook for Ebitda.

All of that contributed to the stock’s 45% stock death dive.

There’s one issue, though, that speaks more to the future of Valeant’s fundamentals, rather than bumbling by management. It has to do with the company’s “billion dollar drug,” Xifaxan. It cures irritable bowel syndrome, and it’s Valeant’s top seller and big hope for the future.

The problem with Xifaxan is that it’s sales were light by $180 million. In December, Valeant projected that the drug would generate $390 million in Q4.

So it’s going to be harder for Valeant to get to that $1 billion revenue target. This was a recurring theme on the call. The company generated around $300 million in revenue during Q1 of this year (mostly rom Xifaxan) but guided toward a year end revenue of $2.2 billion.

“Where’s the ramp going to come from,” one analyst asked on the call, “because that’s a big jump.”

Yes it is, just as getting from $210 million a quarter to $1 billion for the year is also a big jump.

Hopes and dreams

Valeant CEO Mike Pearson downplayed this as a “first quarter phenomenon.” He’s still confident in Xifaxan, which Valeant acquired with its $11 billion purchase of Salix Pharmaceuticals, and said that it was one of the company’s growth areas.

But analysts had two big concerns. One being the resignation of Deb Jorn earlier this month. Jorn was responsible for Xifaxan.

Of her exit, all Pearson could say was that she was a valued employee.

The other concern was pointed out by Ummer Raffat, an analyst at Evercore. Raffat said that although a lot of pharmacies canceled Xifaxan orders during Valeant’s recent turmoil, prescriptions were still being filled. He wanted to know if that was a problem with inventory — i.e. that stockpiles of the drug are higher than anyone thought.

Pearson brushed that off. However, inventories have always been a problem for Salix (from Reuters):

Last November, Salix said supply levels for Xifaxan and other drugs were higher than it had indicated, forcing it to slash its full-year earnings forecast.

Pearson said Valeant would reduce the five to nine months of Salix inventory to two months or less by the end of 2015, which will cut revenue by $500 million.

The Department of Justice and the SEC have both been investigating Salix for its inventory levels since 2013.

From Valeant’s 2015 10Q, filed on July 28th:

On February 1, 2013, Salix received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents regarding sales and promotional practices for its Xifaxan®, Relistor® and Apriso® products. Salix and the Company are continuing to respond to the subpoena and are cooperating fully with the subpoena and related government investigation.

The SEC is conducting an investigation into possible securities law violations by Salix relating to disclosures by Salix of inventory amounts in the distribution channel and related issues in press releases, on analyst calls and in Salix’s various SEC filings, as well as related accounting issues. Salix and the Company are cooperating with the SEC in its investigation, including through the production of documents to the SEC Enforcement Staff. We cannot predict the outcome or the duration of the SEC investigation or any other legal proceedings or any enforcement actions or other remedies that may be imposed on Salix or the Company arising out of the SEC investigation.

In short, this is somewhere Valeant needs to be careful.

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