Former billionaire Michael Pearson returned to Valeant Pharmaceuticals from a two-month medical leave on Feb. 29 2016, a Leap Year, however the move wasn't a relief for the embattled drugmaker. Now, Pearson - his business career on the line - will attempt a comeback on the Ides of March.
When Pearson returned to Quebec-based Valeant last Monday, the company withdrew its financial guidance and postponed a call with investors, raising new market jitters amid widespread allegations of impropriety and a pending accounting restatement. With Pearson back at the helm and heavy lifting ahead in order to re-inspire investor confidence, Valeant, once a stock market darling, now plans to update investors on its fourth quarter results and provide new 2016 guidance at 8 a.m ET on March 15.
The update is sure to be a pivotal moment for Pearson and Valeant, and it comes roughly 2060 years after historians say Julius Caesar was assassinated, marking the end of the Roman Republic.
For Valeant, either the investor update will begin answering a long list of questions into the drugmaker's accounting and operating practices, or it will raise new concerns, potentially further undermining the company's plunging credibility. Meanwhile, the new guidance may also shed new light on the extent of potential accounting revisions, or the outcome of an ad hoc board review into Valeant's former mail-order pharmacy channel, Philidor Rx.
Michael "Mike" Pearson, chairman and chief executive officer of Valeant Pharmaceuticals . [+] International Inc., pauses during a Bloomberg Television interview in New York, U.S., on Wednesday, April 23, 2014. Photographer: Scott Eells/Bloomberg
The stakes cannot get any higher.
In mid-December, Valeant said it expected to earn $2.75 billion in fourth quarter sales, at the midpoint of its guidance, and $2.60 in adjusted EPS. Those projections were down from the company's previous estimate of $3.375 billion in sales and $4.10 in adjusted EPS, however, they relieved fears that Philidor was being secretly used as an engine of Valeant’s sales growth, and that its earnings were reliant on drug price increases.
Valeant then disclosed a likely accounting restatement in late February due to its booking of sales by Philidor in previous years. This revelation raised questions on the veracity of Valeant's accounting, but its projections of a minimal net EPS impact also was taken by some as reassuring. However, on Feb. 29, Valeant then suspended the guidance and cancelled its investor update.
Philidor is at the heart of Valeant’s troubles. The unit, consolidated by Valeant in late 2014, was held as a related party entity and went virtually unmentioned in the company’s financial statements until its existence was noted in reports from the Southern Investigative Reporting Foundation and the New York Times this fall.
Valeant subsequently reported that Philidor accounted for less than 7% of total sales, but severed ties with the business in late October after large pharmacy benefit managers raised concern about the propriety of its distribution practices. Since then Valeant’s ad hoc board committee, led by Robert Ingram and including Mason Morfit, a partner at hedge fund ValueAct Capital, has been reviewing the Philidor relationship. During this time, Valeant's shares have collapsed from over $260 in late August to $67 as of mid-day trading.
The ad hoc committee is deciding whether Valeant pre-maturely booked sales that went through Philidoer. At issue is whether shipments to distributors like Philidor should have been booked as upfront sales, and whether those sales should have been reported as related party transactions prior to the unit’s consolidation December 2014. In the latter case, the mystery of Philidor might have been revealed far earlier than the fall of 2015.
Valeant believes that roughly $58 million of net revenues recognized in the second half of 2014 may have been booked incorrectly. Such a revision would reduce the company’s earnings per share by 10-cents and increase 2015 EPS by 9-cents. However, these numbers are yet to be finalized by Valeant and the company’s financial outlook is as up in the air as it’s ever been.
Pearson led Valeant as the company structured an internal specialty pharmacy channel, Philidor Rx, which is at the heart of its current woes. Whether he can begin providing clarity into Valeant next week will surely be the most closely watched event on Wall Street. Presently, Valeant trades under a cloud of suspicion, creating relentless headaches for large shareholders, Ruane Cunniff & Goldfarb, Pershing Square and ValueAct Capital, who's reputations are all also on the line in this stock market disaster.
"We are looking forward to providing Valeant shareholders with an update on the company's progress," CEO Pearson said in a press release.
"February 29th was my first day back to work following a two month medical absence. Now that I have returned, I have been working diligently to review the business so that I can share our latest performance and outlook with shareholders," he added.