3 Prime Reasons Why Valeant Pharmaceuticals Intl. Inc. Plunged 29% in June

By Markets Fool.com


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What: Shares of Valeant Pharmaceuticals , a diversified pharmaceutical company that's primarily used mergers and acquisitions to grow its business, plummeted 29% in June, based on data from S&P Global Market Intelligence. There appear to be three prime culprits behind Valeant's June swoon.

So what: The first issue, which stuck out as a sore thumb to Valeant shareholders, related to the company's first-quarter earnings report (which was filed late). Valeant, coming off a sour deal and $58 million in improperly booked revenue with now-former drug distributor Philidor Rx Services, forged a 20-year drug distribution contract with Walgreens Boots Alliance .

Unfortunately, we observed in its Q1 report that the early stages of this deal have been filled with potholes and bumps for Valeant. Drugs are being reimbursed at rates too low for Valeant to be profitable in some instances, while reimbursements are simply taking too long in other cases. For what it's worth, Walgreens is committed to making its long-term deal with Valeant work, but it doesn't look as if Valeant's distribution woes will be resolved overnight.

Secondly, and also relating to Valeant's Q1 report, the company slashed its full-year guidance, once again. The latest guidance for fiscal 2016 calls for a midpoint of $10 billion in sales, and $6.80 in EPS. By comparison, Valeant's fiscal 2016 midpoints for sales and EPS were $11.1 billion and $9, respectively, in mid-March, and $12.6 billion and $13.50, respectively, in mid-December 2015. With estimates plunging, shareholders have no idea where the bottom is.

Finally, Wall Street pundits continue to be hypercritical of Valeant's $31.3 billion debt load, which has cut off the company's access to further credit following its recent EBIDTA reductions. Analysts have suggested that Valeant's only recourse may be to sell some of its core assets to reduce its debt. Doing so could crush the company's growth potential moving forward.

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Image source: Getty Images.

Now what: Although July has brought a little bit of relief for Valeant shareholders, I wouldn't, by any means, consider this company out of the woods.

The biggest issue for Valeant, in my opinion, is its debt. If the company doesn't sell enough assets, its debt will constrain its ability to make strategic moves. If, however, Valeant gets rid of its core assets and reduces its debt load by 50% to 75%, its remaining assets may not present attractive enough growth prospects to push its share price higher. Worse yet, Valeant could struggle to get anywhere near a fair value for its assets, given its distressed status.

Another debt issue is its debt covenants. Valeant's lenders attached certain "requirements," known as covenants, to Valeant's debt to ensure their loan remains safe. One of these covenants is that Valeant's EBITDA remains at least 2.75 times higher, on an annual basis, than its interest costs on its debt. Valeant is getting dangerously close to breaching this figure, which could, once again, trigger a debt default.

There are no clear answers as to how Valeant will right the ship, and I'd personally suggest sticking to the sidelines until we get more clarity on Valeant's pricing practices, as well as how it will handle reducing its debt.

The article 3 Prime Reasons Why Valeant Pharmaceuticals Intl. Inc. Plunged 29% in June 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, 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.