Hi everyone:
With Valeant hitting a new low yesterday, and a slew of hostile media and analysts reports, I thought I'd drop another line; even though, to readers of this thread, there really isn't anything new or unanticipated in the news.
But before Valeant, a quick status on my take on Allergan: Basically, everything is on hold for the Teva deal to close. My earlier concerns that Teva might want to look for an excuse to bail have been mostly laid to rest. Most of the risks in this transaction are behind us, and what remains are mostly the mechanics of getting to the finish line. Allergan, which last month dropped as low as about $200 after the failed Pfizer deal, has recovered to almost $250 this month as the Teva deal seems more assured. It is now at $237. I continue to think that there is still a bit of a risk-penalty baked into the Allergan share prices that will go away when the deal closes. What will Saunders do with the money he gets from Teva? (Technically, that money is used to pay down debt; but it frees up the balance sheet to support significant new borrowing) -- that's of course anyone's guess. Will he go on an acquisition spree? Will Wall Street like his decisions? To some extent, the price of Allergan today also bakes in some level of expectation with regards to that particular future. Me, I think B&L is lurking out there as a future Allergan company.
Which brings us back to Valeant.
As a reminder, for the past 2 years, on this thread, I have been asserting that Valeant is unsustainable (Actually, David Pyott made this assertion first; I was just agreeing and adding details). They were buying companies and product lines at fantastically high prices (higher than anyone else was willing to pay), financing the acquisitions with junk bond debt, cutting expenses to the bones and then some by shutting down R&D as well as many other functions that sustainable pharma companies consider vital, and raising prices faster than any competition could arise. All the expenses of buying and restructuring their acquisitions were dismissed as "one-time" and "good-will" accounting artifacts, pretending that they aren't real; whereas the short term increase in cashflow -- from reduced expenses and increased prices, before the inevitability of new competition and an organization too stripped to be able to respond becomes reality -- was presented as proof of the genius of the technique. Unsustainable or not, the increased cash flow was used as the backing for making ever larger acquisition, thus masking the decline of assets acquired previously. At $50B, I speculated, Allergan was to have been the last acquisition before the insiders jump off the pyramid scheme and leave the other shareholders (to include, substantially, the would-have-been former Allergan shareholders who would have traded their shares for Valeant in the envisioned transaction) holding the bag. It didn't happen this way, of course. Allergan defended well, found a white knight, and the Valeant insiders were the ones to still be in the inverted pyramid as it tipped. (Serve them right).
So where are we now? The one man who was Valeant in every sense of the word, Michael Pearson, is disgracefully out (but not without a nice golden parachute); I still think he will end up in prison, but only after the election and the final demise of Valeant. So is most of the old Valeant board of Directors and other top financial executive (CFO, controller). Bill Ackman, with his fund taking epic losses on Valeant, has magically transformed himself from being (a big) part of the problem into the one everyone is looking to be the bringer of a solution. For that purpose, he brought over new Joe CEO Papa (who left a mess at his prior company, Perrigo) to replace Pearson.
Papa was brought in by Ackman to execute a strategy I consider impossible here -- affect a corporate turnaround. As if Valeant is still a viable entity (or ever was), and it's original story of "platform company" (meaning that it is more valuable than the sum of its parts) is still valid once various blemishes and missteps are cleaned out. Much of the media, investors, and debtors communities felt obliged to at least give Papa a short breathing period to get a good handle on the situation and put forth a workable plan. Overriding my own human inclination to do likewise, on these pages I wrote that I am not. The mess he left at Perrigo is huge, and the fact that Ackman brought him to execute a plan that based on his continued failure to realize that Valeant can't, and shouldn't, be saved; were enough for me to skip the honeymoon. There is only one thing that can be done with Valeant: Orderly liquidation, and hope there will be something left for the shareholders after the debt-holders are satisfied. Every month that passes without doing so, will make the inevitable liquidation less orderly.
Well, the media and investors' honeymoon is now over too. One analyst after another are now pointing out exactly the same thing -- cashflow is right on the cusp of breaking covenant (and forcing early payment of principle, which Valeant can't do; hence bankruptcy and the bond holders taking over the company, wiping out the shareholders). The (recently renegotiated) covenant requires Valeant to keep a debt-coverage-ratio (ratio between cashflow and debt service requirement; the higher the DCR, the less likely the company is to default on a loan) of 2.75. Under their recently released lowered guidance for the rest of 2016, they will be just a few basis points (hundredth of a percent) above that level (they would have already breached it, but for the renegotiated deal). And, if cashflow doesn't start to seriously rocket upward (it's been going down the last few quarters), then by 2017 the covenant would be breached by a mile. If Valeant was largely "fixed" already, then a close brush with insolvency would represent the low point in their trajectory; but there are still some huge and expensive issues that haven't been addressed -- drug prices that are supposed to go down to mollify insurers and politicians, huge good will write-downs that haven't been affected yet, inventory bloat throughout Eastern Europe, liabilities for the Philidor fiasco, new generic competition against the biggest revenue products, empty pipeline, multiple investigations by Federal and State Attorneys General, SEC crackdown, morale issues with the remaining sales force, loss of trust among many constituencies, insurers dropping coverage level for Valeant products, and the overall brand damage.
There is now, as before, only one path; and Papa's most recent words implies that he is, ever so slowly, coming around to realizing it (much to Ackman's live-TV chagrin): Orderly liquidation of all assets (not just "non-core" -- whatever that means for a company with no core).
Before I close, for your reading pleasure, I assembled a few articles from the past week and a half substantiating my assertion that the media and analysts are coming around to seeing that there is no fix for Valeant:
Debt-Burdened Valeant Must Shed Assets, Analysts Say
https://www.thestreet.com/story/136...sets-analysts-say.html?puc=yahoo&cm_ven=YAHOO
Valeant Falls As Barclays Sees 'No Short-Term Fix'
http://www.investopedia.com/article...-no-shortterm-fix-vrx-wba.asp?partner=YahooSA
http://blogs.barrons.com/stockstowa...-no-short-term-fix/?mod=yahoobarrons&ru=yahoo
Cramer on Valeant: New CEO, but it's still rotten at the core
http://www.cnbc.com/2016/06/15/cram...adline|headline|story&par=yahoo&doc=103718462
A few random shareholders just made the Valeant CEO sound stumped in less than 20 minutes
http://finance.yahoo.com/news/few-random-shareholders-just-made-151352895.html
Things can always get worse: Valeant analyst
http://www.cnbc.com/2016/06/08/thin...adline|headline|story&par=yahoo&doc=103700096
Hope everyone is doing great!
Dan.
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