Valeant Pharmaceuticals International (VRX 37.00) has garnered a lot of news lately. Valeant stock continues to rise after the company won approval from loan holders to amend terms of the company’s debt, granting the pharmaceutical company an additional month to file its annual report.
Under the terms of the amendment, Valeant will now have until May 31 to file its 2015 annual report and until July 31 to file its report for the March 31 quarter. The amendment is an effort to lower the risk of a default on Valeant’s $30 billion debt load if it missed earlier deadlines.
Valeant now agrees to pay lenders a penalty of $50,000 per $10 million of loans and to increase interest rates on the debt by 1%, although this rate could decline if Valeant reaches certain financial targets. The terms of the amendment restrict the company’s ability to make certain acquisitions and other investments as well as pay dividends.
Valeant warned in February that an internal review of its accounting practices would delay the annual report filing. Earlier this week, Valeant stated that the committee had completed its review and found no items requiring further restatements. That's a big win for the company and investors.
Valeant seems to have solved its problems concerning the company’s troubled mail-order pharmacy Philidor, by striking a new deal with Walgreens in December. In addition, the departure of CEO Michael Pearson has created a leadership void. This is another problem which needs to be solved soon, hopefully with a strong replacement.
The company has lowered its sales and earnings estimates for 2016. Analysts now estimate Valeant will earn adjusted EPS of 8.90 in 2016, 11.05 in 2017, and 12.40 in 2018. That's not bad, but there's a huge difference between adjusted EPS and GAAP (Generally Accepted Accounting Principles) earnings per share. In its last report, for the nine months ended 9/30/15, Valeant reported adjusted EPS of 7.38 vs 5.77 a year ago. However, GAAP earnings per share were 0.20 vs 1.11 a year ago. A majority of the huge difference is amortization and impairments expense not included in the adjusted earnings.
In my opinion, Valeant’s adjusted earnings accounting is fundamentally flawed. The company is earning a very small amount of profit and selling at a high stock price, even at the current lower price. In addition, the company’s debt is high and cannot be increased to finance new acquisitions. In addition, interest expense is about to increase significantly. Bankruptcy is a distinct possibility for the company, although VRX is smart and could avoid disaster.
The company will again be in the spotlight on April 27 when former CEO J. Michael Pearson will testify at a Senate hearing examining egregious price hikes in medications. The hearing may not accomplish anything, but Valeant will again be subjected to criticism, which will likely dampen further gains in its stock price later this month.
With activist investor Bill Ackman touting the company 24-7, VRX stock price could move significantly higher. The next hurdle for the company is filing its annual report before May 31. Another delay from the company could spell trouble for the stock. It is now very speculative, and I advise avoiding VRX stock.