Valeant’s latest earnings report contained everything investors usually want to hear. It reported third-quarter revenue of $ 2.8 billion and adjusted earnings per share of $ 2.74. Both topped analysts’ estimates. And the company once again raised its full-year guidance for the top and bottom lines.
Ordinarily, such news would be cause for investors to celebrate. Yet the stock fell hard. After years of outperformance driven by serial acquisitions and an ability to buy drugs and ratchet up their selling price, Valeant’s stock is down more than 35% from an all-time high reached in August. That is far more severe than the about 17% decline for the Nasdaq Biotechnology Index during that time.
Valeant now trades at less than 11 times forward earnings; in August, the shares fetched more than 18 times, according to FactSet. Such a decline will invite value seekers. But investors should consider whether Valeant needs new growth drivers.
Valeant, for instance, faces serious pressure over drug pricing. It disclosed last week that federal prosecutors in New York and Massachusetts have subpoenaed information surrounding its decision making on drug pricing and product distribution.
Beyond legal issues, Valeant signaled its pricing power might be waning, especially when it comes to raising the prices of acquired drugs. “It is likely that we will pursue far fewer, if any, transactions that are focused on mispriced products,” the company said Monday. To that end, Valeant will “seriously consider” spinning off or selling its neurology business, expected to account for 10% of 2016 revenue and a division heavily dependent on price increases.
Chief Executive J. Michael Pearson signaled Monday that the company continues to hunt for more acquisitions. It is just that they will likely be far smaller than the transformative ones it has pursued in the past.
That is because it is unclear the balance sheet can accommodate large deals. Valeant said it had $ 30.1 billion of long-term debt as of Sept. 30. This is about five times end-of-second-quarter shareholders equity.
Valeant’s hobbled stock is also complicating matters. Mr. Pearson said on the earnings call that using shares as an acquisition currency “is no longer an option at all for us.”
With no big deals to look forward to, and pricing pressures unlikely to abate soon, investors hoping to latch onto a turning point for the stock may have to wait a while more.
Write to Charley Grant at [email protected]