Wall Street just turned its back on Valeant Pharmaceuticals and its CEO Mike Pearson, and it is unlike anything we’ve ever seen.
The company was a darling of The Street, and it remains a popular investment for a bunch of really famous hedge funds.
But on Tuesday it fell 40% as the company lowered guidance for 2016 to $11.0 – $11.2 billion from December’s guidance of $12.5 – $12.7 billion.
Pearson addressed Wall Street publicly for the first time since he took medical leave in December, leaving an interim CEO to face an aggressive Congressional hearing on drug prices.
He came back to find that Wall Street had turned equally aggressive.
Confidence is key
The way analysts talked to CEO Mike Pearson Tuesday morning was the same way a parent talks to a teenager who just had the police called on their house party. It was the same way you talk to a dog that just chewed up the furniture. One analyst, David Marris of Wells Fargo, even asked Pearson if he would forego his golden parachute in the event that the board asked him to leave.
Pearson sounded completely clueless. He said he didn’t even know he had a golden parachute totaling around $200 million. He also said he didn’t know when the company would release its annual report, giving April as his best guess. Valeant will be penalised if it isn’t released by March 16.
It was just one of many missteps on the call led by a man who once could do no wrong on Wall Street. Fudged numbers, estimate changes, issues with the company’s new business model and partners — the analysts, usually so lenient with Valeant — caught it all.
Before Valeant became a pariah, its CEO was a considered genius. He was the man who came up with the method to grow a pharmaceutical business without spending significant cash on expensive R&D. He was the man who convinced billionaire hedge fund manager Bill Ackman to help him acquire another pharmaceutical company.
Not any longer
To illustrate this turn, we should probably use one analyst specifically. Nomura’s Shibani Malhotra defended Valeant after it was attacked by a short-seller, writing that the short-sellers accusations were based on “gross misinformation.” When it seemed the board might replace him she said that his ouster would mean the company would lose its “competitive advantage.”
She took a very different tone Tuesday. She told Pearson that it was “difficult for us to fathom” that Valeant’s Q4 revenue collapse was due to a misunderstanding between the company and its new partner, Walgreens.
“Management needs to rebuild credibility with investors,” she said. She pointed out that the company lowered guidance far more than any investor anticipated.
“How can we be confident in what you’re saying in the business given that you were positive in December and January and how can we get confident that Valeant is able to deliver for shareholders,” she asked.
The call sounded like that over and over again.
You’re either making money or you’re not
The analysts didn’t understand Valeant’s cash flow. They didn’t understand how the company, which generated around $300 million in cash in Q1, could possibly generate $2.3 billion (as projected) over the course of the year.
They were concerned too about the company’s new model of relying on volume, rather than prices increases, fretting that this would simply not generate enough cash to satisfy all the needs of the business. Pearson is committed to paying down around $1 billion in debt in 2016, and the company hasn’t managed to cut costs. It also has two product launches to handle this year.
One question they asked over and over was — will Valeant sell non-core businesses? Pearson could provide no colour on that — not on which businesses are non-core, or on how much money a sale could generate. You can expect this to be a sticking point. Hedge fund billionaire Bill Ackman has suggested an asset sale to raise cash, one Pearson rejected already.
There was one glaring error that crystallised Wall Street’s frustration with the stock. It’s pretty simple, and analysts brought it up over and over on the call. Earlier in the day, Valeant said that its Adjusted EBITDA (non-GAAP) for 2016 was expected to be ~$6.2 – $6.6 billion. On the slide presentation during the call, that number was changed to $6 billion.
The analysts called Pearson out on it. Hard. One by one. Until he was forced to apologise.
“It wasn’t switched intentionally,” he said. “It was the wrong number and we apologise.”
Valeant is not in the position where it can make that kind of mistake.