Michael Pearson, now a consultant of Valeant Pharmaceuticals.
Photograph by Bloomberg — Getty Images
By Jen Wieczner
March 15, 2016

Valeant Pharmaceuticals (vrx) shares plunged 48% Tuesday, as the beleaguered drugmaker reported earnings that fell significantly short of Wall Street’s expectations and analysts questioned whether the company should break itself up. Some wondered if a major error in its press release had been made intentionally. There were also some fears that Valeant could default on some of its debt.

What’s truly amazing is that the bad news at Valeant, which has been struggling with an accounting scandal and criticism that it makes its money through predatory price hikes, has taken Wall Street by surprise. Coming into Tuesday nearly half of all Wall Street analysts who rate the stock had it at a buy. And Valeant remains a top holding at a number of hedge funds, including most notably Bill Ackman’s Pershing Square.

While Valeant had hoped to repair investor confidence during a conference call discussing its fourth-quarter 2015 results, it did just the opposite, with CEO Michael Pearson, just back from medical leave two weeks ago, describing the business’s performance as “a mixed combination of good news and bad news.”

The company reported non-GAAP adjusted earnings-per-share of $2.50, well under analysts’ consensus estimates of $2.62. Its revenue for the quarter was $2.8 billion, though Valeant would not compare those results to the previous year, as it is in the process of restating its 2014 sales. Shareholders were especially disappointed by Valeant’s bleak outlook for 2016, with the company now expecting to earn $3 to $4 less per share than it originally forecasted late last year, guidance that it revoked a couple of weeks ago. Valeant also revised its sales estimate for the year to $1.5 billion less than it had predicted previously.

While investors were still digesting the guidance—which was lowered in large part because of a tax accounting change that the company said had been recommended by the Securities and Exchange Commission—an analyst also pointed out that Valeant had made a major error in its press release, forecasting profits for the following four quarters of up to $6.6 billion, when it said in its presentation that it actually expects only $6 billion through the first quarter of 2017. Valeant promised to correct the $600 million typo, but one analyst mused aloud on the conference call that, “it definitely looks like it was switched intentionally.”

Besides the tax accounting change, Valeant blamed its distribution deal with Walgreens (wba) for its lackluster results, saying there had been an unexpected “negative reaction” from insurance payers, who initially did not want to cover the cost of Valeant’s drugs sold at the pharmacy chain. “I think Walgreens did not do a very good job explaining [the specifics of the deal],” Pearson said of his drugstore partner, adding that payers reacted negatively because they were surprised to learn that the arrangement between the companies was not what they expected.

In the meantime, Valeant faces another problem: defaulting on its creditors. The company said it would be in breach of its bond agreements as soon as tomorrow if it fails to file its annual report today—a deadline Valeant already plans to miss, as it has delayed filing its 2015 annual report pending an accounting review that will require it to restate financial results from the last two years. That breach triggers a “cross default,” meaning it would be delinquent on a second credit agreement as well. The company said it plans to amend the agreements to waive the cross default clauses, but wasn’t sure when it would be ready to file the annual report; Pearson said his “best estimate” for submitting it is “sometime in April, but I can’t commit to that.”

 

 

Technical default aside, Valeant’s credit situation also was a concern with analysts on Tuesday, as it has been in the past. The company reinforced that it was not looking to make any more acquisitions until it pays down much of its debt and reduces its leverage by nearly a third. In order to do that, it said it was already in talks to sell off some of its non-core assets, though Pearson declined to specify which businesses he was referring to. “You should expect that there will be a series of non-core divestitures over the course of the year,” he said during the call. When an analyst asked whether Valeant would consider breaking itself up entirely if the stock price still did not recover, Pearson responded that he believed the market would come around once the company demonstrates it can grow successfully under its new strategy.

Valeant said little else about the accounting review or the SEC investigation of the company, though Pearson said the decision to change its own tax accounting going forward was unrelated to either. As analysts needled him with queries about his fitness to run the company, and press reports that the board had considered firing him but kept him on because of a $200 million severance package it would have to pay him, Pearson said he was only entitled to a “pretty modest” payment of vested stock compensation if he got fired. “Maybe I should wish I could get $200 million if I leave, but unfortunately I don’t think that’s the case—or fortunately form an investor’s standpoint, it’s not the case,” he said.

Repeating comments he has made in the past, Pearson said it was up to the board to determine whether he was “the appropriate person to lead this company.” But he noted that as of last week, two different activist investors now control seats on Valeant’s board, including a new member from Bill Ackman’s hedge fund Pershing Square. “I do think our board’s a lot closer to the investors than many boards,” Pearson said.

At least so far that doesn’t appear to have been a good thing. Tuesday showed, once again, that investors have given Pearson and his board too much of the benefit of the doubt. The question is just how much longer they will continue to do so.

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