Health

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The virtuous cycle of borrowing and spending has ended for Valeant Pharmaceuticals.

After years of breakneck growth fueled by cheap debt, the drug company suddenly finds itself facing a wall: It needs to pay back more than $19 billion of debt in the next nine years at a time when debt investors are less and less willing to lend to it.

Just look at the prices on some of its existing bonds, which have plunged in price as much as 20 percent in the past year. 

Price Plunge
Valeant's bonds have sunk as the company faces increasing uncertainty about its finances.
Source: Trace, Bloomberg

The notes were dropping this week even before word got out about the company's plan to restate some of its past earnings, but that announcement especially unnerved debt investors. Even though the restatement didn't end up being disastrous, and shares of the company rallied 10 percent at one point, it still left many unanswered questions about Valeant's controversial relationship with specialty pharmacy Philidor. 

The fate of this company, which is known for advertising cartoon intestines and increasing prices sharply, demonstrates two things: the debt boom is ending, with some painful consequences, and the popular pharmaceutical model of acquiring rivals and raising prices can't persist forever.

The company is a symbol of an easy-money era that spurred trillions of dollars of corporate borrowing. Valeant expanded its debt load when yields were plunging on riskier securities, which worked in its favor at the time. But the company has to figure out how to repay it all now that the cheap-money days are over, with average yields on its debt rising to 8.4 percent from about 5 percent in May 2013. It may very well be even more expensive when the company actually tries to raise money.

Valeant is also a good example of the acquisition spree that's been going on in the pharmaceutical industry. It has made 52 acquisitions worth $35.2 billion since 2008, relying on debt markets to pay for them. That's left it saddled with more than $19 billion of junk-rated debt, about $1.6 billion of cash interest payments this year and a commitment to pay down $2.25 billion in debt by the end of the year.

Price Comparison
Bond prices have risen for Valeant's pharmaceutical peers, Allergan and Endo.
Source:: Trace, Bloomberg

That wouldn't be too much of a problem if the business was looking strong. But that's not so clear.

Acquisitions have been a pillar of Valeant's growth. Another is drug price increases, which have accounted for at least half of the company's recent sales growth. Both of these boosters are all but off the table for now. Congress is breathing down the company's neck on the price front and debt markets have tightened up considerably. 

A series of recent research notes by Wells Fargo analyst David Maris have raised questions about the company’s strategy, accounting and its novel deal with Walgreens to sell drugs at a discount. CVS Health's pharmacy benefit manager announced plans on Monday to restrict access to Jublia, a pricey and heavily advertised toenail fungus drug that is Valeant's second-best-selling product. CVS rival Express Scripts, which has already targeted Valeant products, looks to be doing the same. The two firms manage prescriptions for more than half of all Americans.

Valeant is not an energy company. It's not on the brink of default. It has sold big bond sales, meaning they're more frequently traded. It should be a relatively appealing purchase for debt traders right now. But it's not. And this paints a concerning picture for both this company and the broader market for riskier debt.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net