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Valeant CEO Quits As Ackman Joins Board; Ex-CFO Under Fire

Big changes were brewing at embattled drugmaker Valeant Pharmaceuticals International ( VRX ) Monday, as CEO J. Michael Pearson said he’s leaving as major shareholder William Ackman took a larger role in the company. The stock was up 9% in afternoon trading Monday. Valeant said that it had begun searching for a new CEO to replace Pearson, without specifying Pearson’s departure date. Pearson has headed Valeant for a highly transformative eight years, as a battery of acquisitions brought the company from less than $1 billion in annual revenue to more than $10 billion last year, with a policy of cost-cutting and price increases on acquired drugs making Valeant a favorite of investors but a target of criticism elsewhere. Last fall it all started to collapse, however, as a scandal relating to specialty pharmacy Philidor raised larger issues with Valeant’s accounting. In Monday’s announcement, Valeant said that the ad hoc committee that started reviewing company finances five months ago was nearing completion of its work, and Valeant will have to restate financials for all of 2014 as well as the first quarter of 2015. The statement also said that Valeant plans to file its tardy 10-K for 2015 by April 29, which will prevent it from going into credit default. The discovery of new accounting problems in addition to the Philidor-related ones delayed the filing, the company said. Meanwhile, Ackman, head of hedge fund Pershing Square Capital, will join the board in place of Katharine Stevenson. Ackman had indicated in a letter following Valeant’s d isastrous Q4 earnings report last week that he plans to take a more “proactive” role in protecting Pershing’s large investment in the company, so his joining the board was not a surprise. Valeant’s Ex-CFO Takes Heat A noteworthy development, however, was that Ackman was evidently targeting not only Pearson but former CFO Howard Schiller, who served from December 2011 until last April, when he left his CFO position but remained on the board. The Monday press release fingered Schiller and the leadership in general as the main cause of Valeant’s problems. “The improper conduct of the company’s former chief financial officer and former corporate controller, which resulted in the provision of incorrect information to the committee and the company’s auditors, contributed to the misstatement of results,” it said. “In addition, as part of this assessment of internal control over financial reporting, the company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition.” The release said that Schiller had been asked to resign from the board but refused, setting things up for even more drama in a company that’s already resembling a soap opera. Later Monday, Schiller issued a statement refuting the charges. “Contrary to the statement in the 8-K and press release, at no time did I engage in any improper conduct that relates to any restatement of revenue the company is considering,” Schiller said in the statement. “In addition, at no time did I ever provide any incorrect information to the Audit and Risk Committee or the company’s outside auditors regarding this accounting issue.” Schiller shifted responsibility to the corporate controller, who has been put on administrative leave, according to Monday’s SEC filing. He said that she was the one who evaluated the Philidor situation and decided how to account for it, and he trusted her opinion. Valeant said that, on a preliminary basis, the restatement will subtract $58 million from 2014 revenue and 9 cents from EPS. The first quarter of 2015 should lose $21 million in revenue but gain 7 cents a share in earnings, it said. Wall Street analysts have been turning against Valeant and its management with a vengeance lately, and Monday brought two more downgrades before the CEO news came out. Morningstar warned that change isn’t going to come cheap. “We currently incorporate more than $1 billion in restructuring, legal, and other charges over the next few years,” wrote Morningstar analyst Michael Waterhouse in a research note. Valeant stock rose as much as 17% in early trading on the stock market today , above 31.50, but shares also slipped a bit later and fell below 26, the stock’s lowest price since November 2010. Shares have still plummeted nearly 90% since hitting an all-time high in early August near 264.

Medical Stocks Take Bloodbath; Valeant Creditors Demand New Terms

Disgraced drugmaker Valeant Pharmaceuticals ( VRX ) continued to sell off along with the rest of the medical sector Thursday as reports surfaced that creditors were demanding new terms as the company defaults on its massive debts. Reuters cited anonymous sources saying that in early talks, lenders were asking for higher interest payments and a pledge to pay a larger amount of the bank loans from the proceeds of any Valeant asset sales. Valeant has been in breach of its reporting covenant since Tuesday, when it missed its 10-K filing deadline, which it has 60 days to resolve. However, if it doesn’t file by March 30, it will also be in default with its bank creditors and will have only 30 days to resolve the default. Valeant is about $30 billion in debt after a years-long buying spree, culminating in a failed attempt to buy Allergan ( AGN ) last year. Allergan subsequently merged with Actavis and is now in the process of being bought by Pfizer ( PFE ). By late afternoon on the stock market today , Valeant stock lost 11.5% to 29.69. Medical groups tracked by IBD, even those unrelated to drugs, accounted for the seven worst performing groups out of IBD’s 197 industries. The generic drugs group led the slide with a 2.8% decline. The hardest-hit individual stocks were Valeant’s fellow specialty drugmakers, some of whom have consciously followed Valeant’s business model. Mallinckrodt ( MNK ) authorized a $350 million stock buyback but was down 4.1% to 53.42.   Endo International ( ENDP ), which is headed by former Valeant executive Rajiv De Silva, hit a three-year low of 27.62, trading down 11.4% to 30.03. Horizon Pharma ( HZNP ), which has been criticized for pricing policies much as Valeant has, was down 6.8% after selling off for the last three days. Among major drugmakers, Eli Lilly ( LLY ) tumbled 4.7%. Eli Lilly fell intraday to its lowest level since late 2014.

Valeant Loses Wall Street’s Confidence As Bad News Piles Up

Wall Street analysts gave scathing reviews to the management of Valeant Pharmaceuticals International ( VRX ) Wednesday, a day after a disastrous Q4 report and guidance cut the stock price in half. “We admit upfront, we have been humbled by our stock call on Valeant, which we have defended despite the continuing spate of bad news, as we believed that despite the noise surrounding the company, much of the fundamental businesses had been performing well,” wrote Nomura analyst Shibani Malhotra as she downgraded the stock to neutral from buy. “Despite the fact that our new PT (price target) for $60 represents 79.1% potential upside, we do not expect Valeant shares to outperform the market near term, as we have lost confidence in management’s ability to understand its own business and to provide reliable guidance.” Other analysts echoed the loss of confidence, including Canaccord Genuity’s Corey Davis, who cut the price target to 40 from 75 while maintaining a hold rating. “The weak guidance was likely the last straw for many investors, underscoring the numerous risks that we had highlighted in our recent downgrade,” Davis wrote in his research note. “Further, the threat of default on Valeant’s debt raises additional questions about what is behind the delayed 10-K filing.” Davis added that Valeant was unlikely to risk a credit default by missing its 10-K filing deadline if only a minor restatement of financials is in the works, raising the possibility that yet more bad news is coming. But Rodman & Renshaw analyst Raghuram Selvaraju wrote that a default seems unlikely. “We anticipate that the firm should be in a position to file its 10-K by April of this year and that its creditors would not invoke the cross-default clauses in Valeant’s debt agreements,” Selvaraju wrote in a research note. Selvaraju was one of the few left maintaining a buy rating on the stock, but he lowered his price target to 118 from 150. Jefferies analyst David Steinberg cut his price target in half, to 53, while TD Securities analyst Lennox Gibbs hacked his target to 45 from 110. Nonetheless, Valeant stock was rebounding in the stock market today , up 2.5%, above 34, in midday trading. So was Endo International ( ENDP ), whose stock tumbled 23% Tuesday likely because it’s headed by former Valeant executive Rajiv De Silva; it was up 8%, near 35, midday Wednesday. Specialty drug maker Mallinckrodt ( MNK ) continued to sink as Citron Research short seller Andrew Left, whose research helped blow open the Valeant scandal last year, continued the attacks on Mallinckrodt that he started in November, saying the company “ makes Valeant look like a bunch of choirboys .” Mallinckrodt stock was down 11% Wednesday after sliding 14.5% Tuesday.