Valeant's taking a beating...again

Valeant Pharmaceuticals is taking a beating. The shares are down 11% on Monday, at levels they haven’t hit since November.

Wall Street is still talking about a 40 page report Wells Fargo analyst David Maris put out about the company on Friday. In it, Maris called into question whether or not the company could survive on a business model that emphasises sales volume rather than price increases.

The stock has fallen almost 15% since the report landed last week, and is now trading close to $75 a share. Maris has a target of $65 to $68, or as much as 13% below current levels.

Valeant was forced to change its model after accusations from short seller and government scrutiny brought its aggressive pricing practices to light. Since then, the company was forced to terminate its relationship with a secret pharmacy called Philidor, and company executives have been called to Washington to explain how they set prices.

Valeant signed a new distribution deal with Walgreens to make up for the loss of Philidor, but Maris doesn’t think it’s going to work out so well for them.

And there’s another danger Maris is very clear about in his piece. The fact that Valeant is sitting on $30 billion of debt — which it has, in fairness, said it will spend 2016 paying down — but actually doesn’t have that much in tangible assets.

In fact, if you take out intangible assets, like goodwill for future sales, you have a company very, very much in the red, From Wells Fargo [emphasis ours]:

Approximately 82% of Valeant’s total assets are made up of goodwill and intangibles. We calculate Valeant’s tangible assets, plus cash, as $6.7 billion as of September 30, 2015. When we subtract total debt, we arrive at a value of approximately ($24) billion.

We’ve reached out to Valeant for a response, and will update this post when we hear back.

Maris says that Valeant’s practice of cutting R&D spending already made it necessary for the company to impair goodwill after some time, and that current issues with the company can only make that worse.

If Valeant is forced to impair goodwill or certain intangibles, its leverage ratios and balance sheet risk could further increase. Given the significant leverage that Valeant’s balance sheet is currently supporting, we find this possibility to be very concerning and believe investors should be aware of this risk.

Well now investors know, and it seems they’re not happy about.

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