On Oct. 4, I singled out Valeant Pharmaceuticals International Inc. (NYSE: VRX) as a deeply troubled company, one that was emblematic of just about everything that's corrupt and toxic in today's markets.
The hedge funds loved Valeant thanks to its practice of buying other drug companies using junk bond financing, firing most of their employees - and then sharply hiking the prices of the drugs to which they'd just acquired the rights.
That's an ugly business model. It came into sharp focus in September when Turing Pharmaceuticals' Martin Shkreli bragged about hiking the price of a vital drug essentially just because he could, bringing a ton of bricks in public and political wrath down on the industry's collective head.
Now, I expected VRX shares to plunge, but that ton of bricks landed harder and faster than I thought. And wave after wave of bad news - now including allegations of outright criminal behavior - brought the shares down 40% in one morning, from $148 to below $89 yesterday. The shares eventually rebounded to $118, but not for any good reason.
As you're about to see, for as far as its fallen already, this rotten company could fall a lot farther before it finally craters...
Valeant Can't Catch a Break - and Doesn't Deserve One
This past Thursday, Valeant announced the U.S. government subpoenaed the company over its drug-pricing practices for two specific drugs. The stock dropped sharply in that session and then recovered on Friday. But investors were clearly nervous as they waited for the company's third-quarter earnings report on Monday.
It turns out they had good reason to worry. Earnings weren't the problem; they came in on target. The company earned $3.54 per share on $3.6 billion in revenue, in line with Wall Street expectations. And it nudged up guidance for the year to between $11.67 and $11.87 in earnings per share and said revenue would be between $11 billion and $11.2 billion.
But management announced several changes to Valeant's strategy that suggest that the company is changing course.
First, Valeant said it would reduce its dependence on raising drug prices to boost profits. Price increases have accounted for about 8% of revenue growth in the first nine months of 2015.
Chairman Michael Pearson told investors that "outside pressures" (he really meant politicians) are "changing the pricing environment."
In other words, politicians and the public are appropriately disgusted that a company that spends virtually nothing on R&D is raising prices on old drugs in order to pad its bottom line. For once, the people in D.C. are doing the right thing. As a result, the company expects to keep price increases, which have averaged 66% over the last years, to no more than 10% next year.
He also said that the company would stop buying old drugs and raising their prices, one of its key strategies in recent years. Having been caught with his hand in the cookie jar, Pearson figures he better take it out before his whole arm gets ripped off.
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