Valeant’s implosion raises doubts about activist investors

Mar 22, 2016
<p>Drug company's sharply reduced 2016 profit outlook and 85 percent plunge in shareholder value from year ago threaten Ackman's reputation</p>

If discrediting activist investors is something most corporate boards continue to seek, they got the best present they could have imagined this week with the flurry of negative news at Valeant Pharmaceuticals. On March 21, the company announced it has asked CEO Michael Pearson to step down and that it had charged interim CEO and former CFO Howard Schiller with improper conduct and asked him to relinquish his board seat, which he refused to do after denying any misconduct.  

The quarterly loss the company belatedly reported last week and the destruction of nearly 86 percent of total shareholder value from a year ago has raised serious doubts about the business judgment of activist investor Bill Ackman, whose hedge fund Pershing Square Capital Management became Valeant’s largest shareholder in 2014 and helped it launch a failed hostile takeover bid for Botox manufacturer Allergan. Ackman accepted a seat on Valeant’s board on March 21.

In its preliminary, unaudited results for the fourth quarter of 2015, released on March 15, Valeant reported an unaudited loss of 98 cents per share and slashed its 2016 earnings projection by nearly 26 percent to between $9.50 and $10.50 per share. The company attributed its revised financial outlook for this year to lower revenue assumptions for certain products such as its dermatology and gastrointestinal drugs, as well as ‘increased investment in key functions, such as financial reporting, public and government relations and compliance.’

An article in The Economist, after noting that the March 15 preliminary earnings release was devoid of both a full cash-flow statement and a balance-sheet, said, ‘it appears that Valeant has been generating only just enough cash to pay its $1.6 billion interest bill this year,’ and warned about a possible default if suppliers and customers pull away from the company. In an interview on CNBC yesterday, Harvard Business School professor -- and former Medtronic CEO -- Bill George said Valeant needs to overhaul its business model and must move quickly to sell some of its more successful business units to raise money to pay off much of its $30 billion in debt that’s coming due in 2018.

To read the full Economist story, click here.  

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