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.