A report from Wells Fargo circulating around Wall Street dragged Valeant’s stock down 7% Friday.
Basically Wells is arguing that Valeant’s old, successful business model is finished, and the new one it’s trying to sell to The Street just isn’t going to cut it.
Here’s the real key part of the report:
Overall, we believe that Valeant’s self-proclaimed “new business model” for pharma has been reliant upon 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. We believe that following recent intense scrutiny of its practices, Valeant’s growth may be impeded. Can Valeant adapt to the new environment? We are not sure, but with too many unanswered questions, we believe investors are better off deploying capital elsewhere.
Wells then put its price target for the stock at $65-$68. Right now the stock is at around $87.00.
Until October of last year, Wall Street loved Valeant. The company counted billionaire Bill Ackman as its most vociferous cheerleader, and hedge funds piled into it. Then a short seller’s report called attention to a specialty pharmacy within Valeant no one had ever heard of before called Philidor. It distributed Valeant drugs almost exclusively.
The Philidor controversy added to government scrutiny over Valeant’s lack of R&D spending and practice of acquiring drugs and then jacking up their prices.
So Valeant, seeing a crisis on its hands, backtracked from that model. It said it would lower some of its prices, focus on paying back its $30 billion debt load instead of doing more M&A, and initiated a new partnership with Walgreens.
Through all this, though, criticism over the company’s reliance on price hikes to drive revenue growth remained. When announcing the Walgreens deal, Valeant CEO Mike Pearson said it was never about price, and that Valeant could succeed with an entirely new business model based on sales volume.
“We’ve always had strong growth and volume growth, but the sceptics have said that it’s all price,” Pearson said on CNBC. “This will turn it all into volume.”
Count Wells Fargo among the sceptics, then. Here is an excerpt from the note:
We do not believe that Valeant has provided sufficient clarity of the business arrangement with Walgreens or how this is better for Valeant than the previous Philidor arrangement.
In our recent meeting with Valeant, management stated that it did not know what the dispensing fee will be and where it will be booked (in SG&A or as an adjustment to gross to net). Without knowing what the dispensing fee and the related costs of consignment inventory will be, and whether Walgreens can drive a similar volume as Philidor, it is difficult to determine whether the distribution arrangement with Walgreens is better or worse for Valeant.
Wells Fargo went on to say that they reached out to Walgreens with their questions, and Walgreens had no answers for them. In fact, Walgreens sounds pretty casual about the whole arrangement.
Walgreens described the arrangement as being good for Walgreens, but not a core driver, especially since Walgreen’s is so large. After our discussion with Walgreens, it is our opinion that the deal is not an evolutionary move of the wholesaler channel, but instead, a deal struck out of Valeant’s need to replace its former pharmacy.
Throw in concerns about the company’s giant debt load and some questions about whether Valeant’s previous acquisitions — including one for female libido enhancer called Addyi — were worth the money, and you’ve got an unholy mess.
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