Does Valeant's Bad News Even Matter Anymore?

By Markets Fool.com

Investors would be hard pressed to find a company that's endured more bad news in the past year than Valeant Pharmaceuticals (NYSE: VRX).

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Revelations of triple-digit price increases on decades-old drugs led to Congressional hearings, the dismantling of its distribution partner Philidor, lawsuits, the exit of its longtime CEO, and dwindling sales in the past year.This seemingly endless barrage of bad news has caused Valeant shares to lose 80% of their value since last November, and unfortunately, investors got more bad news yesterday when two executives with close ties to Philidor werearrested for fraud.

Although the investigation remains ongoing, and more arrests could be coming, investors shrugged off the report and sent Valeant's shares slightly higher Thursday. Could this mean that it's finally time for investors to buy Valeant's shares?

Image source: Getty Images.

A tangled web

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Valeant Pharmaceuticals' breakneck pace of mergers and acquisitions quickly transformed it from a small Canadian drugmaker into a global pharmaceutical giant.

Despite saddling the company with tens of billions of dollars in debt, rapidly growing sales prompted many of the world's biggest money managers to cheer the company. Last year, however,optimism for Valeant's business model quickly shifted to pessimism after reports surfaced that Valeant bought two decades-old heart disease drugs, only to increase their prices by hundreds of percent shortly thereafter.

Scrutiny resulting from Valeant's runaway drug pricing eventually led to the discovery of what's turned out to be a far too-close-for-comfort relationship between Philidor and Valeant. Aninternal review of its relationship with Philidor resulted in Valeant's cutting ties with Philidor last year, but Philidor continues to cast a shadow over the company.

Because Philidor was a key reason for the success of some of Valeant's best-selling dermatology drugs, the company has struggled to replace sales lost since its shuttering, and as a result, Valeant's third-quarter revenue fell 11% from a year ago.

Philidor's overhang, however, extends beyond sliding sales. Investigations into Philidor's pricing and sales practices have been ongoing, and yesterday, those investigations resulted in the arrest of Philidor CEO Andrew Davenport and former Valeant executive Gary Tanner.

In a complaint filed by the U.S. Attorney's Office in the Southern District of New York, Davenport and Tanner are accused of willfully and knowingly combining, conspiring, confederating, and agreeing together to commit fraud.

According to the claim, Tanner joined Valeant in 2012 when Valeant acquired the specialty distributor Medicis. Tanner was then tasked with managing Valeant's alternative fulfillment program to boost revenue from drugs that experienced low levels of insurance coverage because of their cost or the availability of generics.

As part of his responsibility, Tanner was instrumental in establishing Philidor as Valeant's largest specialty pharmacy distributor, say prosecutors. Not only did Tanner encourage a deeper relationship with Philidor that drove Philidor's sales higher, but he also rebuffed requests by other Valeant executives to explore relationships with Philidor's competitors to diversify the company away from Philidor. According to the complaint, he took these actions even as he was lobbying on behalf of Davenport for Valeant to buy Philidor.

Ultimately, Tanner successfully convinced Valeant to ink an option to buy Philidor that resulted in Valeant's paying Philidor investors $100 million up front, plus millions more in milestone payments. According to the Justice Department, Tanner's efforts were rewarded with a $10 million kickback paid by Davenport to Tanner via shell companies.

What's next

Despite the news of these arrests being highly publicized, Valeant Pharmaceuticals' shares traded up slightly on Thursday.Perhaps Valeant's resiliency was due to this complaint painting Valeant as Davenport and Tanner's victim. Or perhaps investors are finally immune to Valeant's negative newsflow.

If it's the former, it may be wishful thinking.The complaint names Davenport and Tanner, as well as "others known and unknown," as defendants. Depending on how this case shakes out, Valeant could find its exposure to lawsuits costly and distracting, and that's not a recipe for upside. Overall, the news may put this company a step closer to closure, but nevertheless, there's still too much uncertainty for me to want to buy Valeant's shares.

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Todd Campbell has no position in any stocks mentioned. 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.