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Valeant's record cave-in leaves investors wondering

If Valeant Pharmaceuticals International (VRX) CEO J. Michael Pearson was looking to reassure investors about the health of his embattled company, he could use some help with his bedside manner.

Shares of Valeant caved on Tuesday in their largest swoon in the company's history, dropping more than 51 percent after Valeant cut its 2016 outlook, reported a softer-than-expected fourth quarter and warned that it risked breaching some of its debt agreements if it doesn't file its yearly report on time.

"Our business is not operating on all cylinders," Pearson acknowledged in a call with analysts, making his first public comments since returning from medical leave two weeks ago.

Worth $60 billion before its Oct. 14, 2015, disclosure of a probe by federal prosecutors into issues including how it prices its drugs, Valeant's value is currently hovering just above $11.4 billion.

Already facing an accounting scandal and criticism of predatory price increases, the company on Tuesday reported non-GAAP adjusted earnings-per-share of $2.50, versus consensus estimates of $2.62. Valeant reported revenue of $2.8 billion for the quarter, but it didn't compare that to the prior-year period, given it's still working to restate 2014 sales.

"It's not just the issue of debt levels, it's not just the issue of credibility, it's not just the issue of managed care access. What management did on this call with its commentary was call into question the underlying health of the company," said David Amsellem, a managing director and senior research analyst at Piper Jaffray & Co. "Can we believe what management is saying regarding cash flows? With the reaction in the stock today you have your answer."

"The immediate-term question is surrounding the debt covenants. Beyond that is the whole question of what exactly is the cash flow trajectory of this company," said Asmsellem. "Can they grow, is cash flow sustainable or are we going to see a business in decline going forward?"

Said Jill Lehman, an analyst at CFRA Research: "The debate here has always been can they grow without acquisitions? Today's guidance implies it's quite difficult for them to grow without acquisitions." She added, "The positive thing is they are still projecting growth, at least on a reported basis."

Further shaking confidence, an analyst pointed out during the call a discrepancy between the company press release and slide presentation, with the former projecting profits for the following four quarters of as much as $6.6 billion, while the latter indicated the company expects just $6 billion through the first quarter of 2017.

"That just adds to the perception of trust, and a number of industry participants have indicated their communication could be much improved," David Steinberg, managing director, equity research at Jefferies, said. "It makes a bad situation worse."

Valeant acknowledged the error and said its release would be corrected.

"After today, the question is whether Michael Pearson will still run the company," said Louise Chen, an analyst at Guggenheim Securities, who unlike some other analysts, retains a positive view of the stock. "This company is really cheap. It's a buy, but it's hard to step in because you don't know what the downside is. You've got to think some of the larger shareholders have blown out of here."

At least one major -- and vocal -- stakeholder remained, however. Acknowledging that the potential for a default had created "enormous investor fear," billionaire investor Bill Ackman's Pershing Square Capital Management vowed to play a larger role at the company to protect its investment. Pershing, which last week added a representative to Valeant's board, holds 9 percent of the shares, according to a March 9 regulatory filing.

In October, Ackman engaged in an extended defense of Valeant after the pharmaceutical company lost about half of its market value in just over two weeks, with much of the drop occurring after Citron Research, an investment firm led by short-seller Andrew Left, accused Valeant of fraud.

On Tuesday, Left said the latest turn of events was "not a surprise." Valeant "has become a complete black box," he said in an email.

"What was particularly alarming about this call was that the commentary surrounding certain business segments that were widely regarded as relatively strong performers was decidedly less positive than what we've heard in the past," Piper Jaffray's Amsellem said.

"There had been this view that you could give Valeant the benefit of the doubt, because there were some segments that were strong performers," he said. "I don't think you can give Valeant the benefit of the doubt anymore."

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