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):
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 the 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.