The Laundry List of Reasons Why Valeant Pharmaceuticals Intl. Inc. Plummeted 86% in 2016

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What happened

Shares of Valeant Pharmaceuticals (NYSE: VRX), a drugmaker that's primarily grown by acquisition in recent years, plummeted 86% in 2016, according to data from S&P Global Market Intelligence, making it one of the year's worst-performing stocks. As you may have rightly surmised from the magnitude of the drop, there was a veritable laundry list of issues.

So what

To begin with, debt was a major issue for Valeant in 2016. The embattled drug company wound up restructuring the terms of its debt covenants on two separate occasions in order to avoid defaulting on them as a result of its falling EBITDA-to-interest coverage ratio. By reworking these terms, Valeant piled on extra fees and accepted a higher interest rate, effectively digging an even bigger hole for itself.

Aside from just restructuring its debt covenants, the debt itself has been strangling Valeant's business flexibility. Relatively new CEO Joseph Papa and his management team have been clear that the company needs to sell some of its assets to reduce the $30.4 billion in debt it had at the end of the third quarter. The problem? Valeant hardly made a dent in its debt in 2016, with few takers for its non-core assets. Its peers are well aware of its issues and so aren't willing to pay a premium for its assets.

Image source: Getty Images.

Valeant was also chastised for its pricing practices, specifically regarding cardiovascular drugs Nitropress and Isuprel, which were acquired in February 2015 and increased more than 500% and 200%, respectively, overnight. Former CEO J. Michael Pearson admitted that he and his company made "mistakes" when pricing these drugs, effectively giving lawmakers every reason to be skeptical of Valeant's pricing policies, which have been vital in pumping up sales for its mature drug portfolio.

Legal issues also continued to rear their head. Late in the year, federal prosecutors in New York filed criminal charges against a former Valeant executive and the former CEO of drug distributor Philidor Rx Services, which was an owned subsidiary of Valeant. The charges allege that the Valeant exec was steering an undue amount of business Philidor's way, and in turn, he was receiving a cash kickback from Philidor's CEO.

Valeant's underlying business model has also been a disaster. The company's flagship dermatology product line saw sales tumble by more than 50%, which was caused by a mixture of poor publicity and its new drug distribution deal with Walgreens Boots Alliance, which is heavily favored to benefit Walgreens.

Finally, there were multiple earnings warnings and unfavorable guidance adjustments. Heading into the year, Valeant was expected to earn $13.50 in earnings per share at the midpoint. By year's end, the midpoint was reduced to just $5.40 in EPS.

Now what

The real bad news for Valeant shareholders is that just because the calendar has changed, it doesn't mean the company is going to get healthier. Valeant has a number of issues to address in 2017, and many may not end well.

Image source: Getty Images.

For instance, one of the bigger catalysts for the company this year will pertain to the path it takes to reduce its debt. If it continues to believe that selling non-core assets can generate $8 billion, it could be a slow-moving process. It could, however, choose to sell one of its two core assets (Bausch & Lomb or Salix Pharmaceuticals) and take a big bite out of its debt, but it'll also cripple its future growth prospects in the process. Remember, beyond Salix Pharmaceuticals, most of Valeant's drugs are well beyond their patent life and are reliant on price hikes for sales growth.

There's also little clarity on the legal front. Even though federal prosecutors have only gone after two parties who are no longer a part of Valeant or Philidor, it doesn't mean Valeant won't be hit with fines and/or sales restrictions for its sales practices. If prosecutors believe that Philidor wasn't acting in the interests of insurers as a middleman, fines could still be waiting.

Valeant also has next to no answers as to how it'll kick-start its dermatology business once again. Working out the kinks with Walgreens isn't going to happen overnight.

Despite its relative cheapness (just three times Wall Street's estimated 2017 EPS), Valeant remains a value trap worth avoiding.

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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.The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. The Motley Fool has a disclosure policy.