Why Valeant Pharmaceuticals Intl. Inc. Leaped the Wrong Direction

By Markets Fool.com


Image source: Centers for Disease Control and Prevention.

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What: Shares of Valeant Pharmaceuticals , a global drug developer and medical device maker, fell by as much as 10% during Monday's trading session after the company made two critical announcements: one regarding its CEO, and the other regarding its earnings report and guidance.

So what: First off, Valeant announced that CEO Michael Pearson, who had been suffering from complications of pneumonia and had been on an indefinite medical leave, was returning to his role as CEO effective immediately. Pearson has spearheaded Valeant's growth-by-acquisition strategy, so having him back at the helm will probably add a bit of stability and continuity to Valeant. This announcement is probably not the reason Valeant shares are leaping lower on this Leap Day.

The real issue for Valeant was that it canceled the release of its fourth-quarter earnings results, and completely withdrew its fiscal 2016 guidance. As a quick refresher, the last time Valeant provided guidance, it wasn't up to par with Wall Street's expectations, and just last week Valeant announced that it would be restating its earnings due to accounting errors discovered from an internal investigation of its now-shuttered Philidor RX Services. Ultimately, it should have accounted for $58 million in revenue at a later time, according to the preliminary findings.

Now what: Having Pearson back in the CEO role is a good thing for Valeant; it removes a cloud of worry that the company could be led off track. However, the timing of his return -- right before the Q4 results were due to be released -- and the decision to postpone the earnings release and guidance didn't do much to calm skittish investors.

The bigger issue is whether or not Valeant's drug pricing practices will get a clean bill of health from regulators. Congress has been closely examining Valeant's buy-and-hike strategy of purchasing specialty therapies and immediately increasing their price by large factors. There may be no immediate answer or solution to this question for Valeant or investors, but if you believe in Valeant's growth-by-acquisition model and the cash flow it's derived from it, then this recent hiccup, while unpleasant, may be nothing but a blip over the long run.

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The article Why Valeant Pharmaceuticals Intl. Inc. Leaped the Wrong Direction originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.