It’s been one year since the House Oversight committee called “foul play” on Valeant Pharmaceuticals International Inc. (VRX). This marked the beginning of a 12 month journey through federal investigations that uncovered fraudulent business practices and a price gouging scandal. Since its peak price on August 5, 2015, Valeant’s shares have lost 86% of their value.
The press has treated Valeant’s scandal as a hot commodity, releasing story after story cataloging the drug maker’s fall from glory. Readers have been hungry for it, too -- Google search trends show that the search term “Valeant Scandal” reached peak popularity in November of 2015, and has maintained a high level of popularity ever since.
Between August 5, 2015 and March 15, 2016, Valeant’s shares lost 86% of their value as scandal after scandal unfolded. From its peak to today, Valeant has lost 89 billion dollars in market capitalization. The media pounced on every facet of the scandal over the course of the past year, as politicians heaped scorn, lawyers circled, and hedge fund managers looked for opportunities to profit on the declining stock price. Even though, the last six months have been relatively stable as compared to the 12 months before it, the future is still very much uncertain for Valeant Pharmaceuticals, and what the impact may be on its web of partners.
Let’s recap the various phases of Valeant’s fall from the top:
January 1, 2015 - Aug 5 2015, Price per share: $143.97- $261.23 - Stock price increased 81.74%
After Valeant merged with Biovail in 2010, it started a period of acquisition and growth, adding 16 other pharmaceutical companies to its roster before 2015. This was a common strategy across the pharma industry, as companies found it was cheaper to acquire other drug companies than it was to invest in the R&D necessary to develop new drugs themselves. For Valeant, 2015 showed no signs of stopping - and before August, Valeant had sealed the deal with two other acquisitions. Despite lackluster market performance, the pharma industry was heralded as the “elixir” for stock funds in 2015. News headlines attributed the pharma growth to “aggressive cost-cutters like Valeant Pharmaceuticals” and a low-interest rate environment.
Valeant’s stock reached its peak on August 5th, 2015 with a closing price of $261.23, posting an increase of over 81% YTD.
Phase 2. Headlines tout Valeant as “one of the nation’s most active acquirers”, but a storm was brewing under the surface
August 6th, 2015 - September 29th, 2015, Price per share: $247.73 - $158.08 - stock price dropped 36%
It’s common practice in the pharma industry to acquire a drug from another company and then rename, repackage, and, sometimes, re-price it at exorbitant rates. Two congress members began an investigation into companies that repackaged generic drugs, most notably Valeant, and it started to seep our into news stories across the country. Headlines exposed the scandal: “Drug Goes From $13.50 a tablet to $750, overnight,” reporting on a move where Valeant acquired two heart drugs and promptly raised their prices by 525% and 212% respectively. Despite continuing to acquire, Valeant’s stock price began to tumble.
At the end of September, the situation went sour as pressure mounted on the House Oversight Committee's Chairman to subpoena Valeant for documents related to these two heart drugs. Headlines read, “Democrats on House Panel Attack Heart Drug Price Increases,” and the stock price tumbled further.
October 15, 2015 - November 18, 2015, Price per share: $156.73-$72.60 - Stock price dropped 57.01%
Valeant executives released statements indicating that they had received two federal subpoenas related to their pricing models. One research firm compared Valeant to Enron, and investors that had stayed the course through any initial rockiness began to see the writing on the wall. Stock prices plunged further amidst a swirl of headlines that read “Valeant plunges on fraud claim,” “Valeant’s stock is getting stomped again”, and a feisty opinion piece whose headline called Valeant a “sleazy company”. Valeant was fraudulently creating sales and manufacturing revenues in an effort to mislead Wall Street and investors. Any attempts by the company to explain away its ties to drug distributors did nothing to assuage investor fear. By the end of the month, investment managers followed one another in dropping the stock and the situation was only exacerbated by short selling pressure. The stock finished October down (57%).
Phase 4. Despite further drops, shares of Valeant reached relative stability as CEO took a leave of absence
November 19, 2015 - March 14, 2016, Price per share: $72.42 - $66.68, stock dropped 24.13%
After creating a strategy to reassure investors, CEO J. Michael Pearson took a medical leave of absence. Compared to the movements of previous months, this period was marked by a relative stability in Valeant’s stock price. Towards the end of the period, Valeant released a statement saying that it was being investigated by the Securities and Exchange Commission. At the beginning of March, J Michael Pearson returned from his health leave with "less power and no glory." He was removed as chairman of the board, and big pharma became a topic of Democratic presidential nominee debate.
Phase 5. The final dagger - headlines claimed Valeant was “better off dead than alive”
March 7, 2016 - March 15, 2016, Price per share: $69.55 - 26.98
The final phase of Valeant’s downfall came after the company released lower-than-expected earnings and warned that it could default on some of its debt. Joshua Brown, a financial advisor at Ritholtz Wealth Management, claimed that they were “better off dead than alive” as their debt load had officially surpassed their market capitalization. On March 15, 2016, the stock saw it’s worst day ever, losing over half of its value in a single day.
The last six months have been relatively uneventful for Valeant’s share price - moving from $26.98 (3/18) to $26.42 at market close on September 28, 2016, even if it doesn’t seem like that in the press. It appears, though, as if the storm is not over for Valeant. Management changes and ongoing investigations continue to keep the spotlight on this former Wall Street darling. The company has recently released turnaround plans, but Wells Fargo analyst David Maris questioned whether it wasn’t just “new paint on the same old shed.” Others warn that its massive debt problem may eventually lead to default and bankruptcy.
Despite Valeant’s poor performance, its woes haven’t weighed down its competitors - the pharmaceutical industry is up 4% in the past year, according to the S&P Pharmaceuticals Select Industry Index.
As you’re picking investments to add to your portfolio, consider investing in a broad mix to prevent your portfolio from being affected by the poor performance of any one company’s stock.
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Commentary is provided for educational and informational purposes only and should not be considered as investment advice. Investing involves risk including the risk of loss. Before investing, consider your investment objectives, financial resources and risk factors.