Valeant Pharmaceuticals had its annual shareholder meeting in Leval, Canada, on Tuesday and, as is custom, after the company’s presentation the floor was opened up to questions from shareholders.
The shareholders, few though they were, came impressively prepared. They asked tough questions that new CEO Joe Papa was forced to skirt in typical smooth CEO fashion.
They asked about why they hadn’t heard more about the scandal that brought Valeant’s stock careening down 90% since October. They asked questions about the company’s accounting and its issues with regulators over its drug-pricing practices.
Papa’s responses to them were canned at the very best.
After platitudes about how Walgreen’s had been a “good partner so far” to the company, and after praise for Valeant’s product line and a reframed commitment to its research-and-development pipeline, it seemed as if Papa is still a little stumped about what’s next for the company.
Debt and distribution
But first let’s talk about the presentation. There were two big takeaways there. The first was that Valeant will try to pay down a ton of debt, and fast. The company plans to use $1.7 billion to do so in 2016. Papa said debt reduction was “important to the future of the company,” which jibes with the Bloomberg report that Valeant just contracted Morgan Stanley to help it sell some of its dermatology assets.
Papa didn’t rule out selling more assets, but he’s walking a fine line. The company’s projected earnings for 2016 of $4.8 billion to $4.95 billion already put it in danger of falling below threshholds it must meet to comply with creditor agreements.
The other big issue in the presentation was Xifaxan. It’s a drug used to treat irritable bowel syndrome that Valeant projected would be a $1 billion product this year. Well, now it looks as if it won’t be, and Papa is focused on ramping up its sale to the 10% to 15% of American adults who suffer from IBS and other gastro issues. No plan was laid out for doing that, but one thing is for sure: It will cost money.
Now for the questions. There weren’t many, but they were of pretty high quality. For example, right out of the gate, the first shareholder asked about how much goodwill Valeant had on its books. Goodwill is a measure of intangible assets that a business collects after making an acquisition. Papa didn’t seem to know the answer to this at first, but then a member of his staff said the company had $18.5 billion in goodwill on the books.
Valeant has an $8 billion market cap. Makes you wonder exactly what all that goodwill means (or meant) in the first place.
The next question from a shareholder is key. He’s a dermatologist who sells Valeant products. He said he thought the problem with the Walgreen’s deal, which Papa acknowledges is off to a bumpy start, wasn’t really Walgreen’s but rather the insurers.
“We need to address the insurance issue,” he said. “I think that’s what blocks it and prevents my patients from getting products on a more timely basis.”
Papa didn’t really have answers for that. Part of the issue is that Valeant’s scandals frayed the company’s relationships with insurers and healthcare providers. S0me severed their relationships with Valeant when it was found that the company was using a now-defunct private pharmacy to trick insurers into paying for Valeant drugs outside their client’s offerings.
Repairing those relationships will take time, and Valeant needs cash now.
Papa also got a question about why shareholders didn’t know more about what’s going on with Valeant’s price-hiking problems and the rest of the scandal that took place this fall. Papa didn’t answer that.
One angry shareholder asked why former CEO Michael Pearson, who presided over Valeant’s near-demise, got a $9 million pay package. Papa said it was in his contract but failed to discuss the fact that Valeant is retaining Pearson as a consultant for two years along with perks like paying for his travel, health insurance, and office.
Lastly, Papa skirted a question about Valeant’s changing business model. A shareholder asked whether Valeant’s seemingly newfound focus on research and development was a new business model. Papa said simply that the company didn’t focus on how much it spends on R&D, just how productive that R&D is.
Plus, let’s be real: It doesn’t have the cash. It doesn’t have the cash (or the ability, thanks to its creditor agreements) to go back to growing through acquisitions either. Eventually (after who knows how many asset sales and legal issues) this will all be over, and Valeant will have to be something – the question is what.
You can see why Papa is stumped.