Valeant is getting slammed after another conference-call fail

Valeant Pharmaceuticals has again held a conference call to calm investors about its falling stock price.

The company's stock has fallen by more than half over past month on questions surrounding the company's organic growth, its drug pricing, and its relationship with a shady specialty pharmacy called Philidor.

The latest call, held Tuesday, failed to address one of Wall Street's key concerns about Valeant's future: when the company would lock in a partnership with a new specialty pharmacy.

On Monday hedge fund billionaire Bill Ackman, Valeant's third-largest shareholder, held a call in which he suggested that Valeant would announce a new partnership with another specialty pharmacy - one that distributes drugs and fills prescriptions with insurance companies for big pharmaceutical firms.

But Valeant did not announce that it had locked in such a partnership, leaving Wall Street with questions about how fast Valeant could make up for the loss of a key distributor and how much revenue it would lose in the meantime.

Valeant's stock is down 7%.

Controversy

After reports of Philidor's shady, potentially illegal, practices with insurance providers surfaced, Valeant terminated its relationship with Philidor, which distributed Valeant products almost exclusively, last month. Valeant CEO Michael Pearson said that Philidor represented only $190 million worth of revenue for the company in the third quarter this year and that it would be shut down by January 30.

Some analysts worried that this quick termination was "reactive," given that no wrongdoing had been proved.

Pearson, however, said the controversy surrounding Valeant was harming its business in Canada and the loss of Philidor was disrupting the sales of its dermatological products, which were distributed mostly by Philidor.

"The downsides in Q4 will be in dermatology and in ... neurology to some extent," Pearson said. "Obviously the closure of Philidor will impact Q4."

After these bearish statements, Pearson went on to laud the company's "organic" growth in the Middle East and Eastern Europe, urological products, and other segments of Valeant's business.

"Valeant is a company that has grown very fast ... One of the issues with rapid growth is that you don't always pay attention to what the outside world is saying," Pearson said.

He closed his written remarks saying that Valeant would continue to grow organically without relying on price increases and that it would continue its commitment to patients.

Any discussion of guidance was pushed back to Valeant's December Investor Day, though Pearson said he felt "very good about our organic growth next year."

Questions about Philidor were tabled because of the pharmacy's tenuous legal situation.

And with that, the Q&A started.

The Questions

A UBS analyst asked Pearson how quickly Valeant would be able to make up for the loss of Philidor in its dermatological channel. Pearson responded by saying half of Valeant's business was done through traditional channels but Valeant was working quickly to fix its relationships with doctors.

"We are also working hard to reach out to payers and other distribution partners," Pearson said, referring to insurers, some of which had severed ties with Philidor even before issues with its business practices surfaced.

One of the pharmacies in Philidor's "network" accused it of fraudulently purchasing other pharmacies around the country to use their credentials to process payments in states where Philidor was not licensed. It would then use those credentials to push insurers to fill prescriptions for products they would normally consider too expensive.

Most of the products Philidor distributed were not life or death - they were treatments for things like acne or foot fungus, so insurers didn't think the patients really needed an expensive brand name rather than a cheaper generic alternative.

"I would not be shocked to see some volume declines in the next few weeks," Pearson said when asked about specialty pharmacy distribution. "But I don't think it will be significant."

He went on to say that Valeant would try to come up with a specialty pharmacy program that would be "distinctive" from its competitors.

Umer Raffat of Evercore ISI also asked about Philidor.

He asked whether Philidor was "also acting as a co-pay manager for any products beyond" the 7% of Valeant product revenue it distributed.

Pearson said no.

Legal risks

But that wasn't the last question about legal risks. Analysts wanted to know whether Valeant had done a risk assessment.

Pearson said the company was confident in its controls and annual risk assessments.

"Philidor, I need to remind everyone, that it was a separate company," Pearson said. "Philidor's management has assured me that there has been no wrongdoing ... We continue to look at our controls."

Valeant purchased the option to buy Philidor for $100 million. No additional payment was required to exercise that option. Pearson said that if Valeant entered into a relationship with another specialty pharmacy, it would merely be contractual. It would not have the option to buy it.

He also said that co-pay prices - which were incredibly low at Philidor - would not change at this new specialty pharmacy.

He continued: "In a company this size it's impossible to have full knowledge of everything at all times."

Pearson later said that Philidor had found outside counsel and that he could not determine when Valeant's in-house ad hoc investigative committee would be finished with its investigation into Philidor's practices.

In the meantime, Pearson said, all is not lost without Philidor. Other specialty pharmacies still prescribe Valeant products, as can retail pharmacies.

"What we don't have is a specific Valeant access program through a specialty pharmacy," Pearson said. "That's what we need to put in place."

'Quite Positive'

Pearson could not tell analysts how many hospitals Valeant had reached out to repair its image and relationships. He did say, however, that Valeant had talked to some of the major players and the reception had been "quite positive."

He also could not tell analysts how the hunt was going for a new specialty pharmacy with which Valeant could work out an access program deal, but he said specialty pharmacies had given Valeant a "good reception."

As for how many doctors Valeant had talked to, a Valeant executive said working with prescribers was standard practice for the company. He added that Valeant was focusing a lot of time and resources to its marketing and sales teams.

"We're listening more to critics," Pearson said.

One analyst asked whether Valeant had spoken with creditors about potential liquidity issues.

"Our cash flow is significant," the company's CFO said. He said he did not see any issue with paying down Valeant's $34 billion debt load. One analyst said she estimated that Valeant would have to pay down $3 billion in debt next year.

Pearson did not comment directly on Valeant's debt schedule, but he reaffirmed that the company's intention was to use its cash to delever and that it had not been locked out of accessing the debt market. It has a $23 million debt payment in December, but he would not discuss targets in 2016.

"The lion's share of cash flow generated next year will go to debt repayment," Pearson said.

A stock buyback, which Pearson suggested during a quarterly call in October, is off the table because of the weight of the company's debt.

This is key for Valeant, because part of its business model involves purchasing companies to grow. Without a solid hold on debt and a stable stock price, its expansion model has to be put on hold. That has made Wall Street concerned about the company's growth in general.

Confidence

One analyst said flat out that Pearson didn't sound confident that there was no fraud at Philidor, or at Valeant. He asked what Pearson and Valeant planned to do to repair the company's reputation.

"I don't think you know me if you don't think I'm confident," Pearson said. "We're very confident."'

On morale, he said employees were upset at the negative headlines but there had been no departures of note lately and there was a retention program in place for employees. Those who have been compensated in stock are naturally concerned.

"I think people inside the company are upset ... even pissed," Pearson continued. "We're a very ethical company." Luckily for the company, he pointed out, people around the world mostly know Valeant as Bausch & Lomb.

Other players in the market have been less bullish on Valeant's prospect. Last week Goldman Sachs sold 1.3 million of Valeant's stock that Pearson had put up as collateral for a $100 million loan.

"I have no other loans or anything else with any other brokerages," Pearson said. "Those were the only shares that I had that I used as collateral."

In a filing this spring Valeant disclosed that Pearson had over 2 million shares pledged as collateral for personal debts. It also said it was encouraging Pearson to reduce that number and would no longer allow employees to put up Valeant stock as collateral for personal debt.

The call ended there.