The Valeant Pharmaceuticals Exodus Continues -- Only This Time It's Internal

By Sean Williams Markets Fool.com


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You don't have to be a stock market maven to understand that Valeant Pharmaceuticals (NYSE: VRX) has had a brutal year. The embattled drugmaker is down more than 80% year to date, and it's off more than 94% since hitting its all-time highs during the summer of 2015.

Valeant has a laundry list of serious problems

Valeant's troubles continue to boil primarily around its crushingly high debt levels, its legal woes, and its struggling flagship operating segment, dermatology.

Valeant ended the third quarter with $30.4 billion in debt, a slight decrease from the sequential second quarter, but certainly not enough for Wall Street and investors to cheer. Valeant's new CEO, Joseph Papa, has made it clear that Valeant needs to sell some of its assets to reduce the crippling pressure that its debt is placing on the company.

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The problem is that Valeant is stuck between a rock and a hard place. If Valeant chooses to sell its non-core assets, which compose about 20% of its annual revenue, it may not generate enough capital to make a big enough dent in its debt load. We've already seen assets it attempted to sell sitting on the market longer than anticipated (ahem, iNova Pharmaceuticals), which is probably because its peers understand its troubles and thus don't want to pay a premium for its assets.

On the flip side, if Valeant sells core assets like Salix Pharmaceuticals or Bausch & Lomb, which is something Papa hasn't ruled out for the right price, it could give up a big pathway to future growth. Aside from Salix, a number of Valeant's therapies are older and reliant on price increases to drive growth. With lawmakers on Capitol Hill closely monitoring Valeant's pricing practices following the Nitropress/Isuprel price-hike "mistakes," relying on price increases to drive growth going forward probably won't cut it for Valeant.

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The cloud of uncertainty overhanging Valeant because of its ongoing legal woes is another reason Wall Street has headed for the exit. In recent weeks we've learned that federal prosecutors have charged former Valeant exec Gary Tanner and former Philidor Rx Services CEO Andrew Davenport with accounting fraud. Allegedly, Tanner was funneling an inordinately large amount of business to Philidor, an entity owned by Valeant, lining Davenport's pockets in the process. In return, Tanner received some hefty kickbacks. Drug distributors are supposed to act as neutral parties, or at least disclose their relationship with a drug developer. It appears that may not have happened with Philidor. It's possible the criminal charges end there, but there's also a genuine possibility that Valeant could be fined or face sales restrictions for its seemingly anti-competitive actions.

In terms of its ongoing business, Valeant has clearly faced issues with its existing product portfolio. Dermatology sales have been halved in recent quarters, and the company's new drug distribution deal with Walgreens Boots Alliancehasn't panned so far.

Now it's dealing with an internal exodus

These factors are more than enough reason to send Wall Street and investors scurrying. Apparently, they're also enough to send Valeant executives packing, too.

According to a press release from Valeant on Monday, Dec. 12, three high-level executives are leaving the company, including former chief financial officer Rob Rosiello, who has been transitioning the CFO role to Paul Herendeen; Ari Kellen, an executive VP and company group chairman responsible for assisting the company's pipeline; and Anne Whitaker, also an executive VP and company group chairman responsible for supporting the dermatology business.


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In one sense, change could be good for Valeant. After its share price has lost more than 90% of its value since the summer of 2015, any change in direction would probably be considered a good one at this point. Both the company's previous CEO, J. Michael Pearson, and former CFO, Howard Schiller, have also left their positions.

On the other hand, this exodus could also imply that Valeant is in worse shape than Wall Street realizes. We obviously don't know the reason for many of these departures. It could be that these executives are being squeezed out by the poor performance of Valeant's share price -- or it may be that they don't see a long-term future with the company based on its current trajectory. Most importantly, it could be worrisome to see Valeant losing talent in key growth areas, such as dermatology and its pipeline.

Regardless of the reason, seeing three major executive departures announced on the same day isn't very reassuring to investors, and it provides yet another reason to keep your distance from the company. Until we see a clear reversal of fortune in Valeant's underlying core businesses, witness a decisive reduction in its debt and an improvement in its financial flexibility, and have a better understanding of how its legal issues could affect its business and balance sheet, Valeant doesn't have enough redeeming qualities to make it a worthy investment -- no matter how low its P/E gets.

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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.

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