Mike Pearson, CEO of embattled pharmaceutical company Valeant VRX, was hospitalized over the Christmas holiday for severe pneumonia:
The head of troubled Canadian pharmaceutical company Valeant Pharmaceuticals Inc. has been hospitalized. Valeant spokeswoman Laurie Little said in an emailed statement that Chief Executive Michael Pearson has been admitted for "severe" pneumonia. No other details were given.
VRX is down over 55% from its July peak. The stock began to diverge to the downside in September after lawmakers mentioned it in connection with price gouging by drug companies. Volatility in the stock took hold in October after Citron Research accused Valeant of channel stuffing via its specialty pharma.
Key Man Risk?
In November Valeant cut ties with specialty pharma, Philidor, due to its aggressive sales practices. Specialty pharmas reportedly represented about 7% of the company's Q3 2015 revenue. However, Philidor was key to Valeant's business model of [i] acquiring pharmaceutical companies, [ii] raising prices on existing drugs and [iii] convincing doctors to continue to recommend drugs where the patents had expired. I estimated that the regulatory and/or legal risks associated with Philidor could be greater than $500 million. Valeant's exposure to those risks remains to be seen.
Pearson has vowed to beat back the allegations and restore Valeant's reputation. CNBC's Meg Tirrell posted this message on Twitter TWTR from Pearson during the company's December 16th investor day:
CEO: "The shorts attacked us hard... and that's fine. They said what they had to say and ... it's our job to prove that every allegation they (short sellers) made is false. And that's what we're going to do."
It would be difficult for Valeant to disprove those allegations without Pearson completely engaged. First of all, Pearson was one the people who crafted Valeant's strategy of growth through acquisition and reduction of R&D costs. He could also be paramount to Valeant's attempt to ringfence Philidor and its potential regulatory and legal risks. To underscore just how key Pearson is to Valeant, one person on Stocktwits mentioned Pearson's hospitalization and KaloBilos Pharmaceuticals' KBIO delisting in the same sentence:
Two biotech stocks [are] poised for change on Monday's opening; the CEO [of one company is] hospitalized and the other is getting delisted.
In my opinion, VRX trades more according to sentiment than earnings fundamentals at this point. If there is any doubt that Pearson may around to right the ship, VRX could plummet.
Happy Talk Could End In Q4
Despite the happy talk surrounding Valeant's comeback and its recent distribution agreement with Walgreen's, the first order of business is to convince investors to look past the company's Q4 2015 reforecast.
Due to price cuts on certain drugs, and cutting ties with Philidor, Valeant expects Q4 revenue of $2.7 to $2.8 billion, down from $3.25 to $3.45 billion; it projects adjusted eps of $2.55 to $2.65, down from $4.40 to $4.20. At the mid-point of the range, revenue and eps could be lower than the original projection(s) by 18% and 37%, respectively. It also begs the question, "If revenue from specialty pharmas was only 7%, then how could the Q4 reforecast be 18% lower?" I doubt that price cuts for a select number of drugs would account for the difference.
Secondly, Q4 also includes revenue from Sprout Pharmaceuticals which Valeant recently acquired for about $1 billion. Despite numerous conference calls and presentations to rally investors around VRX, the Q4 reforecast seems to buttress what shorts have been saying -- the business model is broken and Spout's female Viagra drug is a $1 billion headache. Without Pearson engaged to craft another round of "talking points," the share price could begin to reflect the short thesis of $35.
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