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.

On Halloween 2016, Valeant Pharmaceuticals International Inc. saw some ghosts.  

The specialty pharmaceutical firm's shares fell 12 percent on Monday, after Bloomberg News reported ex-CEO Michael Pearson and ex-CFO Howard Schiller are the subjects of a criminal probe over potential accounting fraud, related to Valeant's now-dead (or undead?) relationship with the specialty pharmacy Philidor.

Shareholders might be overrating the material impact of such a probe of ex-executives, embarrassing as it might be.  

But the potential Valeant is generally at greater legal risk -- and a criminal investigation of the architect of its business model points flashing neon arrows in that direction --  is absolutely something to worry about, given the company's financial state. Valeant is the subject of a possibly criminal federal probe related to Philidor, and it's being sued or investigated by everyone from furious ex-shareholders to Quebecois financial regulators. 

Valeant had about $850 million in cash at the end of the second quarter, but hasn't built a reserve for potential legal settlements. Add in $31 billion in debt and a string of quarterly losses -- with results next week likely to disappoint -- and Valeant's position looks more precarious.

Haunting
Valeant's share price performance over the past year and a half is the stuff of investor nightmares
Source: Bloomberg

Valeant's cash stockpile will likely dwindle if its struggling businesses failed to recover significantly in the latest quarter. It lost $300 million in the second quarter, following even deeper losses in the previous two quarters.

Red and Green
Valeant's deteriorating business has not been a boon to its cash position
Source: Bloomberg

Valeant's cash holdings are not wildly out line with other specialty pharmaceutical firms of its size. But it is on the very low side for a non-financial, oil & gas, or utility company with $31 billion in debt. Firms with such a debt load tend to be well-established and relatively stable firms that generate a good deal more cash than Valeant does. 

Friends in Debt
Companies with a Valeant sized debt load tend to have and generate substantially more cash than the embattled specialty pharmaceutical firm
Source: Bloomberg
All data is from the most recent reported quarter.

Valeant's debt means it has a pretty thin line to walk; a major legal settlement could jeopardize its ability to service it or to maintain covenants with creditors that have already been loosened multiple times. The company has been able to ease terms twice, but at some point creditors may lose patience. Valeant's quarterly interest expense alone is in excess of $400 million, and its credit agreement amendments boosted the rates it pays on some of its debt. 

Debt Costs
In addition to making investors extra worried about its every misstep, Valeant's debt load is increasingly costly to maintain
Source: Bloomberg

Long-promised asset sales may add cushion or pay down some debt, but they have failed to materialize. The company will have an exceedingly hard time digging the $8 billion -- and 11-times-Ebitda average valuation -- it is targeting out of these sales, given the often marginal or depreciated businesses it reportedly has on the block. And any significant asset sales will mean cutting more out of its already diminished earnings power.

Given third-quarter prescription trends for Valeant's eye, skin, and gut drugs, the company's November 8 earnings report will likely come with yet another guidance cut, which will look even worse under the shadow of this latest news.  

Regardless of what leadership says next week, a turnaround is still distant. Valeant is still in survival mode. 

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