Big Pharma, Big Business & Accounting Foundations
Big Pharma, Big Business & Accounting Foundations
A few years ago, Valeant Pharmaceuticals International Inc. was the pride and joy of the Canadian pharmaceutical industry. At the time, it was the nation’s most valuable company by stock market value. Fast forward to 2018, the very same company had lost more than 95 percent of its stock market value before slightly rebounding and stabilizing. The company had let go of its CEO, and it had been rebranded as Bausch Health Companies Inc. So what happened? Whether you are a pharmaceutical health-care company, a retailer, a manufacturer, or a mom-and-pop shop on main street, there are fundamental business, accounting, and ethical practices that must be respected. Let’s go back and document the rise, fall, and future of this company.
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Building Value: R&D and Growth Plan
At the peak of Valeant’s perceived value, its stock stood at $262.52; however, less than two years later, it had plunged to a low of $8.51. In mid-2018, the stock was trading in the $20-to-$25 range. So let’s look at the fundamentals behind these dramatic changes. The company’s rise to glory was initially based on internal development and, in large part, by the product portfolio it built through major acquisitions. For example, Valeant bought Bausch & Lomb for $8.7 billion, Medicis for $2.4 billion, and Obagi Medical Products for $418 million.
Because the company was acquiring assets and adding to its brand portfolio, it was spending less on research and development than a traditional pharmaceutical company typically does. The net result was a strong bottom line and short-term profitability that pleased the markets. However, the acquisition spree also left the company with long-term problems: (1) a heavy debt load and (2) the need to invest more to build its future product pipeline internally. There were other problems that would lead stakeholders to look even closer at the company’s books.
Paying the Price for Loose Ethical Practices
One of the early signs that Valeant was playing fast and loose with the truth was when it restated (corrected) its earnings target by $600 million in 2016. Why did this happen? Well, the company blamed it on a typo. Yes, a typo. Try that excuse with your instructors on your projects, and it will not work out well for you. However, this was not a school assignment. It was an official company report, from a multibillion-dollar, publicly traded, international company with a responsibility to all its stakeholders (shareholders, government agencies, employees, etc.).
If improper accounting was strike one, the second strike was based on predatory price policies to boost growth. This issue gained the attention down south when Bernie Sanders and other politicians demanded answers as to why a vital heart drug increased dramatically overnight. Everyone knows that pharmaceutical companies have tremendous margins, but they also have major research and development costs. However, when you increase the price of a drug that patients need to survive by 5500 percent overnight, people are going to take notice and demand answers. A report from a Deutsche Bank analyst also revealed that the company inflated prices on 54 consumer drugs in a single year with an average increase of 66 percent (far above industry averages and normal protocol).
The company was under siege for its actions when a “special relationship” with an online pharmacy called Philidor Rx Services was brought to light. There were rumours of shady practices, including the use of fake names like “Brian Wilson and Peter Parker” in covert email communications from top executives. This eventually led to the conviction of a former Valeant executive and the CEO of Philidor for a multibillion-dollar kickback scheme. The link and appearance of impropriety added to people’s concerns about Valeant.
Mountain of Debt: A Crushing Concern
The run of acquisitions helped build the company’s reputation and fueled its revenue stream but it also led to a heavy debt load. When a company is a rising star and there are expectations of major growth ahead, investors and bankers may feel reassured. However, with all the other issues facing the company, the debt load became a central source of concern. So, in the past two years, under financial pressure, Valeant the “acquisition machine” began the process of divesting certain major assets and reduced its debt load by more than 20 percent, or $6.9 billion. In the process, it sold three skin care brands to L’Oréal for $1.3 billion, and it also sold its Dendreon Pharmaceuticals unit to the SanPower Group company for $820 million.
The Way Forward: Rebranding and Rebuilding Trust
Changing the name of the company was the easy part. Bausch Health Companies Inc. was selected to reflect the company’s diverse activities, including pharmaceuticals, medical devices, and over-the-counter consumer products. However, rebuilding trust and regaining the faith of all stakeholders will require that the company follow proper accounting procedures, respect ethical guidelines, and demonstrate consistent profitability through solid cost management and successful product development and commercialization.
The Valeant Annual Report of 2017 began with a letter to the shareholders signed by CEO Joseph C. Papa, indicating three core goals: (1) investing in core franchises with attractive growth potential, (2) launching new products with meaningful opportunities, and (3) resolving legacy issues (lawsuits) and de-risking. The plan referred to three phases. In phase one, the goal was to stabilize the ship back in 2016. Phase two, 2017-2018, was referred to as the turnaround stage. The forward-looking third phase was called the transformation.
Let’s dig into some of the details from the annual report. Revenues were down from $9.5 billion to $8.6 billion but that was to be expected because the company was selling off divisions and product lines. As previously noted, the company had reduced its debt by about 20 percent. Net income stood at $2.4 billion, whereas the company had suffered a loss of $2.4 billion in the previous year. So the question remained, what would the turnaround phase look like in two or three years? That is unclear today, but the Valeant/Bosch Health Companies will be judged on fundamental accounting metrics, good business decisions, and sound ethical practices. There is no other way forward. The market is watching.
Questions for Discussion
1.Describe some of the fundamental accounting metrics discussed in this case and explain their importance as they relate to the company’s market valuation.
2. How did some of the questionable practices impact the company’s bottom line and its strategic direction during the past few years?
3. Find the company’s most recent annual report (SEDAR.com). Compare the results for the past three years and analyze the trends. Are they positive or negative? Explain.
4. Conduct some research and find articles discussing Valeant/Bausch Health Companies Inc. Has the company bought or sold any additional product assets (acquisition or divestment)?