Tag Archives: Valeant

Can Valeant Go To Zero?

Valeant (VRX) stock is now at $10. After a brief, Roman Candle launch to $260, $10 is the level where it traded in early 2009. It may be one of the few stocks that has gone back its financial crisis trading level. It is now likely on a long, slow death march to zero.

It was reported that Bill Ackman has completely liquidated his Pershing Square hedge fund position in VRX.  Any institutional investment manager or pension fund who left its investment in Pershing Square long enough to see this happen should be investigated for breach of fiduciary duty.   Ackman’s fund reportedly lost over $4 billion in VRX.  I suspect that number was massaged to the low side for public consumption purposes.

I began to look at VRX with a fine-tooth comb just about 12 months ago.  On March 15, 2016, I wrote:  “The SEC Should Suspend VRX Trading: The Company Smells Like Enron.” The stock had dropped fro $260 to $37 in less than a year:

The initial triggers were concerns over the Valeant’s drug-pricing policies and questions surrounding its methodology for booking revenues. However, with just a casual “look under the hood” at VRX’s SEC-filed financials, there is likely a great deal of fraud lurking beneath what’s already been questioned. In fact, this is starting to smell a lot like Enron or Bear Stearns. The only component missing from this story is a CNBC rant from Cramer issuing a table-pounding buy on VRX stock. That may yet occur.

To begin with, the Company is carrying $30.2 billion in long term debt against just $9 billion of tangible assets. $39 billion of VRX’s assets is in the form of goodwill and intangibles. VRX’s self-assessed book value is $6.4 billion. But VRX’s tangible book value is negative $32.6 billion.

On March 18, 2016, I wrote: “Valeant (VRX): ‘Hope’ Is Not A Valid Investment Strategy,” after the stock had dropped another 28% from March 15th:

VRX will not default because the banks will grant as much leeway to VRX as is needed to keep the corpse alive. At this point in time, VRX’s assets likely are worth enough to cover the bank debt obligations. Just like a vampire would want to keep a body warm and the pulse ticking while sucking out the blood, the banks will hold up VRX in order to get as much money out as possible.

Of course, the longer this drags out, the uglier it will become for all economically interested parties. Because there’s accounting and disclosure fraud involved, we can expect the class-action shareholder lawsuits to pile up once the lawyers get a whiff of the blood being sucked out by the banks.Untitled

But keeping VRX alive for creditor purposes won’t help the stock. At this stage in the game, VRX stock will descend – sometimes quickly, sometimes slowly – below $10. In other words, VRX’s stock has entered the Irreversible Debt Spiral.

On April 5, 2016, I wrote: “Valeant (VRX): The Short Seller’s ATM Machine” after the stock popped up on news that an “internal review” showed that its books were clean. There’s that “hope” trade again:

The Company’s declaration that its financials are now valid is based on a review of the matter conducted by a committee that was composed of VRX’s board of directors. In no way can the case be made that this review was in any respect independent or “arm’s length.” This is another trait of a Company that is on the ropes: self-declared exoneration.

Without a doubt, the path of VRX’s stock to much lower stock prices will be littered with news-driven price-spikes like today. This is why VRX stock is a short-seller’s ATM. Every spike can be shorted for short-term profits. Make sure to hold on to some amount of a “core” position in order to profit from the next eventual new-driven waterfall. This is how similar stocks before VRX – like Enron, Bear Stearns, Countrywide FInancial, etc – traded until they finally dropped below $10.

Over the next few months I followed the VRX drama including its attempted asset sales. The Company was unloading “core” businesses for a fraction of the price it had paid for them over the previous few years. To this day I can not understand how:  1) Ackman continued to throw good money after bad in an attempt to prop up a house of cards and 2) how Ackman’s investors allowed him to continue throwing good money after bad. It only took one detailed review of VRX’s business history and 10-K to see that VRX was quite similar to Enron.

The Valeant saga is emblematic of the entire U.S. political, economic and financial system. The entire system is enveloped by the criminality of the people and entities running it – a criminality cloaked in catastrophically unpayable debt and now blatant fraud. It was a similar environment in this country when Enron imploded and those of us who understood what was happening had hoped that Enron would be the warning signal to everyone that would inspire the badly needed reform. Unfortunately, Greenspan inflated an even bigger fraudulent asset bubble than the one he had previously inflated that had led to Enron. You know the rest of the story from there.

Now our system is beset with a monetary and debt bubble that has inflated all asset classes beyond any conceivably recognizable “intrinsic” value. The Valeants and Enrons were fair warning and no one listened. The next collapse is going to dwarf the implosion of the two asset bubbles that preceded it. Fortunately, for those who are willing to “see” and accept this inevitable fate, gold and silver (precious metals) is the one asset class that has been fraudulently held down well below their intrinsic value.

If you are still holding on to some Valeant stock, let go of that insanely irrational “hope,” sell your shares and use the money to buy some gold and silver.

Is Valeant The Next Enron?

Earlier this year in March Valeant stock plunged in one day from $70 to $36.  I had not paid much attention to the VRX Saga until then.  When I examined the financials I was quite aghast with what looked to be the potential for another Enron – LINK.  The financials are riddled with multiple accounting improprieties, if not outright fraud.  The balance sheet sports over $31 billion in debt against just $9 billion in tangible assets.  It’s tangible net worth is negative $32.6 billion.

I stopped following the Valeant Saga once Bill Ackman made a lot of noise announcing a new CEO and board.  I figured the stock would bob and weave before and after every press release Ackman crafted to generate interest in the stock.   Early April was my last commentary on the stock, although I’ve considered featuring it my Short Seller’s Journal as a great short idea.

But today VRX stock caught my attention because it dropped over 6% on heavy volume  for no apparent reason.  Upon closer inspection, it looks like VRX may be in danger of violating its debt covenants this year.  VRX appears to be in an irreversible debt spiral. Valeant’s current credit rating from Moody’s is B2.    VRX’s ratings have been on a downward path for several years.  Typically this is an irreversible path that eventually leads to bankruptcy of some kind or a pre-pack debt restructuring.

I was fooling around with graphs earlier and noticed an absolutely stunning similarity between Enron’s stock and Valeant’s stock.

Untitled

Untitled1

Where there’s smoke in the stock market, there’s usually fire.  At some point I would bet – in fact I am betting with puts – that VRX shareholders are going to get doused with napalm…But hey, stock and bond investors should be grateful.  Moody’s had Enron rated triple-A until just before it filed for bankruptcy.  At least with VRX, Moody’s has been gracious enough to give investors a “heads up.”

Valeant (VRX) Is Now Selling “Furniture” To Keep The Lights On

Valeant stock is down another 10% today.  I’m wondering if some of the Wall Street Journal writers are reading this blog because the WSJ published an article late yesterday in which it reported that VRX could be forced to write-down its goodwill.  I published an article two days ago in which I analyzed why VRX’s goodwill “asset” was likely fraudulent.

VRX said it won’t meet the March 15th deadline to file its delayed 10-K.  It has until March 30th to file, otherwise it has 30 days before the bank creditors can declare an event of default and demand repayment of the debt.  Because VRX’s tangible assets are worth less than the amount of debt outstanding, the most likely scenario is that the banks will grant covenant relief.  At that point, VRX will attempt to sell assets in order to help pay down debt.

An analyst quoted in yesterday’s NY Times agrees with my assessment:   “I’m not sure that the businesses are worth the debt. The value of the assets depended in part on Valeant’s ability to take price increases and get insurers to pay for these overpriced drugs. The assumptions they made when they acquired these businesses no longer apply.”

VRX is entering the “IDS” stage of business failure – the “Irreversible Debt Spiral.” Reportedly VRX has signed confidentiality agreements with potential buyers of some of VRX’s businesses, some of which VRX overpayed to buy in the past few years (Bausch & Lomb, Obagi and Solta).   At this point VRX’s stock should begin another leg down, below $10.

VRX’s survival as a going concern will depend on two factors:  1)  the degree to which creditors are willing to restructure VRX’s debt obligations and 2) the amount of capital to pay down debt that VRX can raise through asset sales.  The latter variable is now more challenging because potential buyers know VRX is desperate.

Regardless of the VRX’s future as a going concern, VRX stock is headed lower.  Any professional money manager who continues to hold this stock on behalf of investors is, at this point, in  serious breach of its fiduciary duty.

The SEC Should Suspend VRX Trading: The Company Smells Like Enron

Valeant Pharmaceuticals (VRX) stock has plunged 86% since August 6. The latest plunge occurred today, with the stock losing 51% from its close of $78 yesterday (click to enlarge):

Untitled

The initial triggers were concerns over the Valeant’s drug-pricing policies and questions surrounding its methodology for booking revenues. However, with just a casual “look under the hood” at VRX’s SEC-filed financials, there is likely a great deal of fraud lurking beneath what’s already been questioned. In fact, this is starting to smell a lot like Enron or Bear Stearns.  The only component missing from this story is a CNBC rant from Cramer issuing a table-pounding buy on VRX stock.  That may yet occur.

To begin with,  the Company is carrying $30.2 billion in long term debt against just  $9 billion of tangible assets.  $39 billion of VRX’s assets is in the form of goodwill and intangibles.  VRX’s self-assessed book value is $6.4 billion.  But VRX’s tangible book value is negative $32.6 billion.

Goodwill is a nebulous concept that assigns value to the amount paid for an acquisition over and above the value of the assets acquired.  Often it’s nothing more than a “plug” number to account for the amount by which a Company like VRX overpays for an acquisition.  “Intangibles” are similar in that, in VRX’s case, it’s the value VRX has assigned to product brands, corporate brands, product rights, etc.  Both goodwill and intangible estimates are highly subjective and highly susceptible to judgement errors and fraud.   In just the 3rd quarter alone, VRX had to write-off $26 million of its intangible value related to its Zelapar drug because of declining sales.

The message the market is sending from the stunning collapse in VRX’s stock price is that something is very wrong with the Company.  It’s already on the ropes from allegations of fraudulent revenue booking practices and price-gouging.  Today the Company issued delayed and unaudited preliminary Q4 results which badly missed revenue and earnings estimates.

But that’s not the most troubling aspect.  On Feb 29 this year, VRX filed a notice with theUntitled1 SEC disclosing that it would be delaying the release of its 2015 10-K.  This is a big red flag, especially in the context of the accounting fraud allegations. This was followed by a reduction in 2016 earnings guidance the Company attributed to an “inadvertent error.”  But then the Company further lowered 2016 guidance with today’s unaudited Q4 earnings announcement.  Finally, the Company disclosed potential loan covenant violations that could lead to bond defaults.

If the SEC was in the business of protecting the individual investor, it would suspend trading in VRX’s stock because the frequent cliff-dive drops in the stock make it pretty clear that certain market participants have knowledge about the Company that is not being widely made available to the public.

I would suggest that given everything that has transpired in the VRX saga, there is some degree – if not a rampant amount – of fraud with this Company.  The stock price is signalling this:   VRX has the distinct odor of Enron or Bear Stearns coming from it.   Any investment advisor or institutional money manager who does not liquidate its holdings in this stock immediately is in breach of its fiduciary duty.