What Caused Valeant’s Epic 90% Plunge

March 20, 2016, 5:52 PM UTC
J. Michael Pearson, Chairman of the board and Chief Executive Officer of Valeant Pharmaceuticals International Inc., speaks during their annual general meeting in Laval, Quebec
J. Michael Pearson, Chairman of the board and Chief Executive Officer of Valeant Pharmaceuticals International Inc., speaks during their annual general meeting in Laval, Quebec May 20, 2014. Canada's Valeant Pharmaceuticals International Inc said it will not make an all-cash bid for drugmaker Allergan Inc as many had expected last week when the company said it would improve its cash and stock offer for the Botox maker. REUTERS/Christinne Muschi (CANADA - Tags: BUSINESS HEALTH) - RTR3Q0U2
Photograph by Christinne Muschi — Reuters

The Valeant Pharmaceuticals scandal keeps getting worse.

Last Tuesday, the troubled drug company announced in a fumbled release—it overstated the company’s earnings target by $600 million, which the company blamed on a typo—that it had significantly missed analysts’ estimates in the forth quarter. At first Valeant (VRX) blamed the earning troubles in part on Walgreens Boots Alliance (WBA) for not living up to its end of a new distribution deal, but Valeant later backed off that claim.

The company also said that it could soon have a problem with its creditors. The company appears to be in breach of its lending covenants for a missing a deadline to file its full 2015 financial reports.

Valeant had long been a darling of Wall Street. The company’s rapid acquisition strategy appeared to produce lots of growth, and not a lot of need to spend money on R&D, often the biggest expense for a drug market. CEO Michael Pearson became a star. But ever since last summer, the company has had to face allegations of improper accounting, and that it used predatory price hikes to boost growth.

The fall from grace for Valeant is threatening the reputations of a number of investors who have stuck with the company, including hedge fund bigwig Bill Ackman, and mutual fund Sequoia.

Valeant’s shares, which were as high as $262 last August, plunged another 50% after the earnings announcement, and continued to fall for the rest of the week. They closed on Friday at just under $27. Here’s a timeline of the epic fall:

August 14: Senator, and presidential hopeful, Bernie Sanders and Congressman Elijah Cummings request information on why the company aggressively raised the price of two heart drugs.

September 28: Investigation of Valeant’s drug price strategy grows as 18 Democratic leaders call for a subpoena of the company. Outrage of drug price increases had been stirred by a New York Times story of a former hedge fund manager turned drug company CEO who hiked a drug used by AIDS patients by nearly 5500% overnight. Shares of Valeant fall 16%.

October 5: Study by Deutsche Bank analyst finds that it’s not just two drugs. The report concludes that Valeant has jacked up prices on 54 other meds this year alone by an average of 66%, far more than the rest of the drug industry.

October 6: Hedge fund Bill Ackman, and one of the Valeant’s largest shareholders, defends the drug company’s strategy saying it does a lot more to spur research and development than most people give the company credit for. The defense doesn’t make a lot of sense, and it falls on deaf ears.

October 14: Valeant confirms that it has received federal subpoena over its drug pricing strategy.

October 15: Australian hedge fund manager John Hempton, who has long questioned Valeant’s accounting, is the first one to utter publicly utter the word Philidor. But Hempton’s cryptic post, written like a scene out of The Graduate, offers no clues as what Philidor is, or that it is connected to Valeant.

October 19: On an earnings call with analysts, Valeant CEO Pearson says the company will ease up on its strategy of buying up drugs it thinks are mispriced and hiking prices. Also that day, a story from the Southern Investigative Reporting Foundation is the first to detail the odd ties between Valeant and Philidor, a rapidly growing specialty pharmacy that appears to be controlled by Valeant, but had never been disclosed to Valeant shareholders. The story says that R & O Pharmacy, an affiliate of Philidor, has sued Valeant saying it believes the drug giant may be the target of fraud or engaged in fraud itself.

October 20: A report by Citron Research, run by activist short-seller Andrew Left (who is actively shorting Valeant), reveals more information about Philidor and it’s network “of phantom captive pharmacies.” Left accuses the company of accounting fraud, and compares it to Enron.

October 22: Valeant calls Left’s report erroneous. The company says it hasn’t used Philidor to book fake sales. It says Philidor is a separate company, but that Philidor’s financials are included on Valeant’s financial statements. Valeant says it has purchased an option to buy the company. Shareholders are unpleased by the lack of disclosure and odd relationship. Valeant’s shares have now plunged 30% in three days. Left calls Valeant’s relationship with Philidor the “turd in the punchbowl.” Valeant says it will hold a conference call to clarify its relationship with Philidor, but says it won’t do it until after the weekend.

Interview with Andrew Left, Short Seller Behind Valeant Selloff on Enron Comparison
Andrew Left, whose stock-commentary site Citron Research raised questions about the drugmaker that led to a stock rout.Bloomberg Bloomberg via Getty Images
Photograph by Bloomberg via Getty Images


October 26: An investigation by the Wall Street Journal finds that Valeant employees were frequently involved with the operations at Philidor, and used fake aliases including those of comic book characters, like Peter Parker, to hide their identity. On Valeant’s conference call, the company discloses for the first time that it paid Philidor $100 million to buy the company. But it maintains that the operations of the two companies are separate. Valeant says it believes it has done nothing wrong. But says it’s forming a special committee of the board to investigating its relationship with Philidor. Still, the conference call is unable to boost Valeant’s stock and leaves plenty of questions unanswered.

October 30: Valeant says it is cutting its ties to Philidor, and that the pharmacy will shut down immediately. Allegations have emerged that Philidor may have changed prescriptions to push Valeant’s high-priced drugs on patients, rather than generics. Ackman holds a four-hour conference call to defend the company. He predicts the stock will more than double. On the call, Ackman refers to a number of instances of fraud in the drug industry and the large settlements that the companies had to pay. He says Valeant is likely to be under legal scrutiny for a while. But the conference call has the opposite affect: Valeant’s shares fall another 16%.

Dec 15, 2015: Valeant inks a deal to distribute its drugs through pharmacy chain Walgreens Boots Alliance.

Dec 16, 2015: The Canadian drugmaker says its Q4 profit was hit when it cut ties with pharmacy Philidor Rx Services, but it could contain the damage in 2016 and grow profit.

Dec 28, 2015: Valeant appoints group of company executives to take over duties of its Chief Executive Michael Pearson until he returns from medical leave.

Jan 6, 2016: The company appoints its former CFO Howard Schiller as interim CEO.

Jan 28, 2016: Campaign of Democratic presidential contender Hillary Clinton posts a blog detailing exorbitant price hikes for a migraine drug made by Valeant.

Feb 4, 2016: At a U.S. congressional hearing interim CEO Howard Schiller puts forward a conciliatory face, testifying that his company had changed its business and pricing tactics.

Feb 22, 2016: Valeant says it would restate its financial results for 2014 and 2015 after identifying some sales of Philidor that should have been recognized when products were dispensed to patients.

Feb 29, 2016: Valeant discloses that it is under investigation by the U.S. Securities and Exchange Commission a day after announcing the return of CEO Pearson from medical leave and withdrawing 2016 guidance.

March 1, 2016: Bill Ackman, who bought more shares of Valeant in late 2015, goes on CNBC to say that everything will be just at the company. “We expect much of the uncertainty will be resolved in the relative short term, hopefully over the next few or so weeks,” says Ackman.

Key Speakers At The 20th Annual Sohn Investment Conference
Hedge fund manager Bill Ackman at the 2015 Sohn Investment Conference, where he described Valeant as “a very early-stage Berkshire.”Photograph by Andrew Harrer — Bloomberg via Getty Images
Photograph by Andrew Harrer — Bloomberg via Getty Images


March 7, 2016: Valeant says it would release preliminary quarterly results and guidance on March 15, two week after it was originally scheduled to be released.

March 8, 2016: Bill Ackman, a week after saying everything was just fine at Valeant, tells an investor conference that the company may soon need new management.

Mar 9, 2016: The company adds a representative from shareholder Pershing Square Capital Management to its board as well as two other new directors.

Mar 10, 2016: A U.S. congressional committee urges Valeant to explain why it was withholding documents related to an investigation into steep hikes in prices of two of the company’s heart drugs.

Mar 15, 2016: Valeant cuts 2016 revenue forecast by about 12 percent and says a delay in filing its annual report could mean a debt default, causing its shares to plunge.

March 17, 2016: S&P says it is putting the debt of Bill Ackman’s publicly traded investment vehicle on review because of his Valeant losses. Ackman says the investment vehicle is down 26% in 2016, making it among the worst performing hedge funds of the year. Of the 11 stocks in Ackman’s hedge fund portfolio, only one is up more than 1% in 2016.

March 18, 2016: CEO Pearson sends a memo to his staff reassuring them that the company will not go bankrupt. The price of Valeant’s debt had fallen to 76 cents on the dollar, roughly meaning that investors believed there was a 24% chance the company would not be able to pay back it’s creditors. “I want to apologize directly to each of you for the distractions this intense scrutiny is causing you,” Pearson wrote in the email to Valeant employees. A few days earlier, on its earnings call, Pearson acknowledge that Valeant has become a tough place to work.

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