After US$600 million typo, Valeant CEO is back on the hot seat

A typo on a press release from Michael Pearson's Valeant Pharmaceuticals International Inc. left analysts baffled and investors angry.
A typo on a press release from Michael Pearson's Valeant Pharmaceuticals International Inc. left analysts baffled and investors angry.PHOTO: BLOOMBERG

NEW YORK (BLOOMBERG) - Michael Pearson and his company, Valeant Pharmaceuticals International Inc., were supposed to calm Wall Street doubters on Tuesday. Instead: chaos.

What began before dawn with disappointing financial news quickly snowballed into the worst day in the drug company's history, leaving investors wondering if Mr Pearson, its controversial chief, can regain his grip.

The CEO, who built Valeant on a stream of acquisitions, returned from a two-month medical leave for pneumonia just two weeks ago. He found the company in worse shape than he left it after last year's drug-pricing scandal.  And then came Tuesday.

The indignities came fast and furious: a US$600 million (S$827.3 million) typo in a press release, a conference call that left analysts and investors baffled and angry, Valeant's top investor, the Sequoia Fund, losing US$1.26 billion on a 51 per cent stock drop, and news that the company doesn't have its numbers straight enough to to file its earnings reports on time, potentially imperiling its ability to stay compliant with the repayment of debt that's ballooned to US$30 billion.

"Every time the company convenes a call it seems that there's something new revealed that's worrisome," said David Amsellem of Piper Jaffray & Co. in New York. "All of this leads me to conclude that the management doesn't have a good handle on these various businesses." Laurie Little, a Valeant spokeswoman, declined to comment.

If Valeant were to restore investor confidence, it would have to overcome what might've been the worst analyst call in the history of analyst calls.

Chief Financial Officer Rob Rosiello referred to a slide that showed that by one measure, its 2016 earnings would be US$6 billion. Three hours earlier, the company had said in a press release it would be as much as US$6.6 billion.

"There are too many weird things happening here," said Matthew Duch, a money manager at Calvert Investments. "There were typos. That just shows the lack of controls, the lack of detail. And if it's happening at these levels, where does it end? You want to be an investor, not a gambler."

Mr Pearson said that due to the repercussions of a scandal concerning the mail-order pharmacy Philidor Rx Services LLC that was uncovered last year the company would be late filing financial results. A delay could put Valeant in technical default on its debt. The company may also have to sell "non-core assets" to pay creditors, Mr Pearson said.

"Just when you think their credibility can't get any lower, they manage to lower it," said Jack Flaherty of New York-based GAM USA Inc., which owns Valeant debt.

During a two-hour call with analysts, Mr Pearson was questioned about why he was the right man to lead the drugmaker. "How can we be confident in what you're saying about the business, given you were positive in December, and January?" said Shibani Malhotra, an analyst with Nomura Securities who has been bullish on the stock, with a buy rating and a US$175 price target. "How do we get comfortable that Valeant is able to execute and deliver for shareholders?" The shares declined 51 per cent to US$33.51 at the close in New York on Tuesday, their lowest closing price since January 2011.

Despite Mr Pearson's gaffes, David M. Steinberg, a Jefferies LLC analyst in San Francisco, said he doubted that Valeant's board would move to replace the CEO.

"The board as little as three weeks ago made a decision and they chose to bring him back," Steinberg said. "So unless they were shocked by today's results and guidance, then I would assume he'll probably be there for a while."

Bill Ackman, the billionaire whose Pershing Square Capital Management LP is one of Valeant's biggest stockholders, said Tuesday that investors have lost "total confidence" in the company. Pershing Square lost more than US$750 million on Tuesday's stock drop.

Concerns about Valeant's business practices, such as how it prices its drugs, have turned the drugmaker from one of the market's top-performing stocks into one of its worst. From 2010 to August 2015, Valeant shares rose more than 10-fold. Since then, they've lost 87 per cent of their value.

"They're going from a growth company to a cigarette butt," said Gary Herbert, a fund manager at Brandywine Global Investment Management in Philadelphia, which oversees about US$57 billion, including Valeant debt. "The market would be well served to see material management change soon."