Valeant Pharmaceuticals (VRX, Financial) tumbled to almost half its valuation Tuesday afternoon after releasing preliminary results for the fourth quarter and guidance for the next 12 months that prompted fears of default from investors.
The second largest guru shareholder Bill Ackman (Trades, Portfolio) released a letter to Pershing Square shareholders reiterating the firm’s belief in Valeant’s underlying value, writing that with the recent appointment of Pershing Vice Chairman Steve Fraidin to Valent’s board, Pershing will be taking a more active role in the company.
“We continue to believe that the value of the underlying business franchises that comprise Valeant are worth multiples of the current market price,” Ackman wrote. “Getting to those values, however, will require restoration of shareholder confidence in the management and governance of the company.”
In the Form 8-K filing, Valeant warned that it risks defaulting on at least 25% of its debt if it doesn’t file its annual report today — which Valeant has already postponed due to an accounting review.
Further, Valeant revised its 2016 outlook lower across the board due to reduced revenue expectations for certain segments, increased investment in functions such as financial reporting and compliance. The company expects total revenue for the year between $11 billion to $11.2 billion, down from previous guidance of $12.5 billion to $12.7 billion. Non-GAAP EPS is expected between $9.50 and $10.50, down from $13.25 to $13.75.
Valeant closed on Monday at $69.04; as of Tuesday afternoon, the company is trading at $34.50.
GuruFocus’ Warning Signs feature has predicted the debt problem at Valeant, posting a “severe” warning for the company’s long-term debt levels. Over the past three years, Valeant has issued about $17.8 billion in debt. Valeant also has a second severe warning for asset growth, which is growing at 61.4% per year, faster than revenue growth of 40.8% over the past five years. This may be an indicator that the business is becoming less efficient.
Just last month, Ackman added to his stake in Valeant by 85%, buying more than 14 million shares. His total current holding of 30.7 million shares was bought for an average $142.99 per share. The stock plunge is the latest blow to Pershing Square, which posted its worst year in the history of the firm in 2015, with gross losses of 19.3%.
Along with accusations that Valeant used mail-order pharmacy Philidor RX to inflate sales, the company also faced harsh criticism for its practice of acquiring drugs and hiking prices. Charlie Munger (Trades, Portfolio) notably called Valeant “deeply immoral” this past November, comparing it to ITT Corp., a conglomerate during the 1960s that acquired more than 350 companies and dissolved in the 1990s.
“I’m holding my nose,” Munger said at an investing event. With the drastic price drop, it seems more investors are doing the same.
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