Health

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.

If there's been a defining characteristic of Valeant's attitude under CEO Mike Pearson, it's been hubris.

It has never presented itself as just another pharma company -- it was bravely redefining the industry, and its growth projections were stratospheric.  

That was well and good during Valeant's bull run. But hubris has become an issue as the company has been battered by a series of problems of its own making: public backlash against its aggressive price hikes, revelations of equally aggressive sales and accounting techniques, and a huge debt load.

Instead of coming to terms with the limitations and consequences of its strategy, the company maintained its issues were just temporary and relatively small speed bumps. 

That all led to Valeant's staggering, humiliating, billion-dollar-plus cut to its 2016 revenue guidance, delivered on Tuesday. The company's new outlook is substantially below even the lowest analyst estimates. It was a cut so abrupt and so broad that it dealt a huge blow to the company's already badly eroded credibility.

The pain was made far worse by the fact that Valeant, until about 6:00 AM on Tuesday, had given the impression that its numbers wouldn't be that bad. The company's mismanagement of expectations and communication, along with increasingly acute questions about the business, sent the shares down 49 percent Tuesday morning, its biggest intraday drop ever.

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Valeant's restated guidance came in far, far below analyst expectations, slamming the stock price.
Source: Bloomberg
Intraday times are displayed in ET.

Shares are below $40, down from a high of $262 last summer.

Valeant is finally shifting tone along with its numbers and getting a bit more humble. Pearson conceded on the company's earnings call Tuesday that the company "wasn't running on all cylinders" and said it had to earn back credibility, which he acknowledged starts with him. But its previous brazen efforts to minimize its problems make it tough to trust anything the company says.

A downward revision to Valeant's previous guidance was expected. But no one, at least no Wall Street analysts, expected anything nearly this bad. That might have been because CEO Mike Pearson has apparently been privately reassuring them and others there were no major surprises coming. The company's backers have suggested uncertainty about the company would be resolved quickly. Well, surprise: The numbers are truly awful. 

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Valeant substantially cut its revenue forecast for 2016; its numbers came in well below analyst consensus.
Source: Bloomberg

Pearson was openly questioned by analysts on Tuesday's call if he was right for the job, and analysts who have been extremely bullish about the company in the past asked how anyone can be confident in what he says about the business.  

As recently as December, the company had a sunny outlook for growth of many of its divisions, now massively curtailed. Its dermatology and gastrointestinal drugs, previously stars, have been hit hard. At the time, the company committed to paying off enough debt to reach a 4x net-debt-to-Ebitda ratio by the end of 2016. At the company's December investor day, Pearson implied Valeant might even be able to return to M&A relatively quickly, after having taken a break since its last major acquisition, of Sprout in August 2015 for about $1 billion.  

On Tuesday, that debt target was nixed, and the bullish zombie-thesis of a relatively rapid return to its old acquisitive business model got a final stake in the brain. Valeant is now shooting for a net debt level at or below 5 times adjusted Ebitda by the end of the year. 

The company's strategic hubris is compounding its communications woes. The way it conducted business led directly to this moment.

Valeant's extreme pricing practices -- for example, it notoriously raised the price of heart drug Isuprel by 525 percent immediately after acquiring it -- led to public and payer backlash, cutting off that major avenue of growth.

Its extreme debt-and-acquisition binge -- Valeant has done 50 deals worth more than $30 billion since 2010 -- has finally reached its limit. In fact, the company is considering hiving off non-core assets to pay down debt. Valeant's presentation on Tuesday was less than reassuring about its ability to keep up its debt obligations. Even bond analysts jumped on the call to quiz it, something you don't see often in pharma earnings. 

Along with its pricing practices, its convoluted relationships with specialty pharmacies such as Philidor angered increasingly powerful pharmacy benefit managers, to the point where they are putting all of Valeant's medicines under a microscope, further hurting its sales. This pressure alone shaved a dollar from the company's 2016 EPS guidance. 

Many of these were known issues well before Tuesday. But the company and its most stalwart supporters chose not to truly reckon with them until now.

The result is plain to see in the radioactive wreckage of the company's forecast, share price and reputation. 

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

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net