Valeant's Feel-Good Moments Don't Last

Just when some good news comes along, another shoe drops.

It started out as a lovely August morning for Valeant and its shareholders. Spoiler alert -- the good vibes didn't last.

Valeant on Thursday announced an agreement with creditors that reduces a required interest maintenance coverage ratio and gives the drugmaker more flexibility to sell assets. The terms aren't too onerous, either: It's paying a small one-time fee and boosting interest rate margins by half a percentage point. 

The news was a rare positive for the drugmaker and the stock got an early lift, climbing as much as 5 percent. That is, until news broke later in the morning that T. Rowe Price is suing Valeant, alleging the company ran a "fraudulent scheme" that cost investors billions. That put the shares in reverse and they were down about 3 percent in afternoon trading. 


A Valeant rally due to an amended credit agreement was halted by a T. Rowe Price lawsuit.

Source: Bloomberg

Intraday times are displayed in ET.

It was vintage Valeant: Some excellent news got turned into a reminder of the company's fundamental issues and checkered past. The feel-goods didn't even last four hours! At least last week, when the company reaffirmed its full-year earnings guidance, the stock had an uninterrupted day of gains before a report of a criminal probe halted investors' celebration.

Valeant's situation remains dire. The $31 billion in total debt it accumulated on sometimes questionable acquisitions under its previous management is nothing to sneeze at. But more flexibility is genuinely good. 

The credit amendment alleviates concerns that poor performance in the near term would cause Valeant to breach debt covenants and trigger repayment demands. Now, even if it performs poorly, the company is a bit farther from that edge and has some breathing room. Valeant has a relatively small collection of term loans to pay down over the next two years. But things get much, much bigger from there. 

Mountains Beyond Mountains

Valeant's creditors gave it some breathing room, but its debt load is still large.

Source: Bloomberg

Valeant is still accident-prone and nothing has changed about some pretty awful fundamentals. The actual business continues to deteriorate. 

Sales at the company's core U.S. dermatology franchise fell 55 percent in the second quarter from a year earlier. If Valeant can't return that business and others to growth, this amendment will just be a minor postponement of debt payback worries, not a step toward resolution. 

The company also needs to prove it can actually make asset sales at a decent valuation in order to pay down debt. It claims that it can sell non-core assets for $8 billion, or a weighted average of 11 times Ebitda. That seems optimistic. Many of its more attractive assets are said to be off limits and those rumored to be available aren't gems.

The T. Rowe suit adds to a heaping helping of legal risk for Valeant, which reportedly faces a criminal probe from federal prosecutors in New York on top of several other investigations. 

T. Rowe was once one of Valeant's biggest shareholders with holdings of as many as 21 million shares at the beginning of the year, and it lost huge amounts of money as shares plummeted. Its suit says the company's pricing, reimbursement and accounting practices exposed it to "massive risks" and resulted in shareholder losses. It wasn't the only firm to take a bath on Valeant, and may not be the last to get litigious about it.


T. Rowe Price sold most of its Valeant shares in the first quarter of 2016, but lost a whole lot of money before that.

Source: Bloomberg

Even with its looser credit terms, Valeant doesn't exactly have cash to spare on legal fights and potential settlements. Or whatever shoe drops next.

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

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    Max Nisen in New York at

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