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.

Valeant Pharmaceuticals International Inc. on Tuesday cut its revenue guidance for 2017. It reported an 8 percent drop in revenue in the second quarter from a year ago, with declines in nearly all lines of business. It divested its second-best-selling drug as part of its effort to chip away at more than $28 billion in debt. More divestitures are set to close in the second half of the year. The company posted its sixth GAAP loss in seven quarters.

But it kept its Ebitda guidance for the year, and that was sufficient to provoke a 9-percent jump in the stock price.  

Valeant sticking to that particular guidance appeared to outweigh several other troubles on investors' minds. But as with many things Valeant, it should be viewed with skepticism. This guidance will likely have a short shelf life. 

Sure, Why Not?
Valeant's earnings produced a big stock price jump despite some clear areas of concern
Source: Bloomberg

It's understandable that Valeant would want to avoid a guidance cut. Its recent history on that front -- in part under prior management -- is profoundly ugly. 

Shaky
Valeant investors are understandably scared of earnings guidance reductions -- they grew all too familiar over the past couple of years
Source: Bloomberg
*Dec. 15 guidance was withdrawn

Guidance always involves uncertainty and guesswork, both for the company and those trying to analyze it. That's especially true in pharma, where competition can cause big sales swings within a year -- particularly for companies, like Valeant, with many older medicines. Guidance can be even shakier for companies -- again, like Valeant -- trying to divest assets to pay debt.

Guidance gets even more difficult to evaluate when it's for a metric that is adjusted by subtracting various numbers from GAAP results -- see the company's many dense slides of GAAP reconciliation for more on that front. 

Valeant's current Ebitda guidance is the same headline number it released in the spring -- but it has different components now.

The company expects several things will hurt Ebitda for the rest of the year, including the divestiture of its second-best-selling medicine (via the sale of Dendreon) and worse-than-expected performance in some business lines. Those negative impacts may be underestimated; this guidance still includes profits from two other divestitures Valeant expects to close later this year. That by itself makes this figure something of a placeholder. And the downward spiral of the company's problem divisions may continue.

Valeant says two positive developments -- delayed competition on some of its older medicines and foreign-exchange gains  -- conveniently offset those negative trends, allowing it to maintain its forecast. But both could easily start to cut the other way. Given the gymnastics of expectation required to maintain this guidance, it will be a surprise if it survives through the company's next earnings call. 

It All Adds Up!
Big changes in Valeant's businesses added up to the exact same adjusted Ebitda guidance for the company
Source: Valeant

It would be one thing to maintain this guidance in the face of divestitures and continued competitive uncertainty if there were evidence of broader growth at the company. But while there was promising year-over-year growth at Salix -- Valeant's largest sub-segment in the second quarter -- the company has yet to prove it can grow that business consistently.

And there's little else to get excited about in the latest quarter's numbers. Revenue was flat or down in all but five of Valeant's 13 reported sub-segments -- one of those (Dendreon) has been divested, and a second one (Obagi) should see its sale close later this year. 

Slim Pickings
Outside of Salix, there's not a lot to get excited about in Valeant's results; two of the precious few growing segments (highlighted) have been or will be divested
Source: Valeant

Things are looking up for Valeant in some ways; it has made better progress on divestitures than I previously expected, and it has pushed out its day of debt reckoning. But investors myopically focused on the company's steady earnings guidance need to find more stable ground. 

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