Coverage: Valeant stock plunges on earnings revision

Valeant Pharmaceuticals International confirmed it would revise its earnings after months of specualtion about the company’s accounting practices and its relationship with distributor Philidor Rx Services.

The news caused the company’s stock to plunge, dropping 13% on Monday alone.

Liz Hoffman and Jacquie McNish of The Wall Street Journal had the day’s news:

An internal review at Valeant Pharmaceuticals International Inc. has raised questions about its accounting practices that will likely prompt the restatement of past financial results.

Valeant said late Monday night that it believes about $58 million of revenue recognized in late 2014 should have instead been booked the following year. ​The misstatements are related to shipments of some Valeant products to a distributor, Philidor Rx Services LLC, which has been at the center of a turbulent few months for Valeant.

The overall effect on Valeant’s financial statements is minimal. The company said it would reduce earnings per share by 10 cents in 2014 and increase the same metric by 9 cents for 2015. Still, it​ comes at a high-stakes moment for the Canada-based drug company, which is trying to repair its image with investors and regulators.

Valeant’s stock, already struggling this year, has fallen more than 19% since Friday, partly on investor concerns that the company had yet to announce when it will report its fourth-quarter and full-year 2015 earnings. On Monday night, the company said it plans to seek an extension from regulators and promised an investor update on Feb. 29, its deadline for doing so.

Interim CEO Howard Schiller called the delay “very disappointing but necessary.”

“The last few months have been challenging on many levels,” he said in a statement. “We have made mistakes in the past and our focus today is on executing our business plan and rebuilding trust.”

Abinaya Vijayaraghavan of Reuters detailed why the company’s stock plunged over the past two days:

Shares of Valeant Pharmaceuticals International slumped as much as 13% on Monday, the second consecutive day of steep declines, wiping out more than $6 billion in market value since Thursday’s close.

The embattled company’s shares closed down 9.7% on Friday, after Wells Fargo started coverage on the Canadian drugmaker with an “underperform” rating.

“We believe the Valeant board and management have made decisions that may have put Valeant at significant business and reputational risk,” Wells Fargo analyst David Maris wrote.

Valeant was pummeled late last year when questions about its business and accounting practices spooked investors, with the stock ending 2015 down about 70% from its August high of $263.81. The stock had fallen 16% this year to Friday’s close.

Meanwhile, Southern Investigative Reporting Foundation said on Monday that Valeant’s interim CEO Howard Schiller used the company’s jet three times in the past month with his family and friends to a small regional airport in Montrose, Colorado near his Telluride ski-house.

Valeant’s options were busy on Monday with 39,000 contracts traded by 1:00 PM ET, at nearly twice the normal pace, and trading appeared to be a mix of bullish and bearish bets, according to options analytics firm Trade Alert.

The stock’s 30-day implied volatility, a gauge of the risk of a large move in the shares, is in the 98th percentile of the range of readings over the last 52 weeks.

Kevin McCoy of USA Today explained the pressure Valeant has been under in recent months:

Questions about the Valeant-Philidor relationship intensified after a report by Citron Research and its executive editor, activist short-seller Andrew Left, alleged that Valeant created “phantom accounts” as part of a purported “fraud to create invoices to deceive the auditors and book revenue.”

Valeant denied the report, and characterized the allegations as part of an effort to drive down the company’s stock price. However, the drugmaker days later cut ties with Philidor after the nation’s three largest pharmacy benefit providers, CVS Health’s Caremark, Express Scripts Holding and UnitedHealth Group’s OptumRx, all said they had ended interactions with the specialty pharmacy.

A final decision on whether to restate earnings for the period between late 2014 and early 2015 has not yet been made, according to the Wall Street Journal report. Valeant has not yet scheduled its fourth-quarter earnings report, company spokeswoman Laurie Little said in an email message earlier Monday.

The company has coped with several major issues in recent months, including the illness of CEO J. Michael Pearson in December. Pearson, said by the company to be suffering from severe pneumonia, was placed on medical leave. He was succeeded on an interim basis by former Valeant chief operating officer Howard Schiller.

More recently, Wells Fargo financial analyst David Maris initiated coverage of Valeant on Friday with an underperform rating, according to several media reports. The report prompted a new Valeant selloff.

On Monday, Maris set cited two valuation models that gave Valeant stock a value as low as $62 a share, but kept his target price range at $65 to $68 a share, Bloomberg News reported.