Drugmaker Valeant faces debt default risk; shares plunge 50 percent

By Rod Nickel and Caroline Humer

(Reuters) - Valeant Pharmaceuticals International Inc's <VRX.TO> shares plunged 50 percent on Tuesday after the company said a delay in filing its annual report put it in danger of a default on its $30 billion in debt.

The news from the Canadian drugmaker, which also slashed its 2016 sales and earnings outlook, prompted Bill Ackman, whose Pershing Square Capital Management is one of Valeant's largest shareholders, to tell investors that he would take a much more active role there.

For years, Valeant was an investor darling, buying up assets and delivering double-digit profit growth. It bought companies and raised prices on their drugs, a strategy that has collapsed under scrutiny of high drug spending.

At the same time, its unusual financial relationship with a pharmacy selling most of its highly profitable dermatology drugs began to fall apart in the fall of 2015, and its shares slid.

During a more than two-hour conference call on Tuesday, Wall Street analysts pressed Chief Executive Officer Michael Pearson for answers. One asked how management can be trusted, given its earlier positive outlooks, and another questioned whether Pearson has the support to lead the company.

“It starts with me,” Pearson said. “We have to meet or exceed this guidance, and I think we all recognize that. It’s a bit of a starting-over point."

Valeant's stock, which was at a high of $263.70 in August, was down 50 percent at $34.54 in New York trading, its biggest decline ever.

The value of stakes held by Pershing Square and ValueAct, another large investor, lost about $700 million on Tuesday. Investment firm Ruane, Cunniff & Goldfarb, its largest holder, lost $1.6 billion and T. Rowe Price <TROW.O> lost $1 billion, according to a Reuters review of investor regulatory filings.

The company, which has incurred a heavy debt load because of a string of acquisitions, is now looking to sell some non-core assets, Pearson said, without being specific.

"Our business is not operating on all cylinders, but we are committed to getting it back on track," said Pearson, who returned last month from a medical leave of absence.

The company, the target of U.S. investigations into its business and accounting practices, reiterated that it would put off filing its annual report with U.S. regulators but for the first time raised the specter of a default.

Valeant said failure to file the report by Tuesday's deadline would put it in breach of agreements with its lenders and that holders of at least 25 percent of any series of notes may deliver a notice of default.

A default would mean that bondholders could demand Valeant repay its debt immediately, Covenant Review analyst Anthony Canale said.

Valeant also has loans from banks and under those agreements, has until March 30 to file audited financial reports. If it fails to do so, it then has 30 days before the breach becomes a default, and major lenders could demand immediate repayment, Canale said.

Valeant said it planned to ask banks for an extension on the deadline. Pearson said his best estimate for filing the annual report was April.

Tuesday's news brought out investor Ackman, who last week placed a member of his team on the company's board.

"We are going to take a much more proactive role at the company (VRX) to protect and maximize the value of our investment," Ackman said.

He said that while it was "highly likely" that Valeant will obtain the waiver, "uncertainty about the potential for a default creates enormous investor fear."

The company's bonds hit all-time lows reached in October.

Until Tuesday, Evercore ISI analyst Umer Raffat had maintained that Valeant's main problem was poor communication. However, Raffat said that now he is trying to figure out whether the company's business problems will extend through 2016.

As of Sept. 30, Valeant had about $30 billion of long-term debt. The company said it would repay at least $1.7 billion this year, down from an earlier forecast of $2.25 billion.

However, Pearson said he was "comfortable" with the company's liquidity and expected Valeant to meet its obligations.

The company said last month it would delay filing its annual report while a board committee looked into its accounting practices. It also said it would restate 2014 and 2015 financial statements.

Laval, Quebec-based Valeant's troubles mounted late last year when questions were raised about its drug pricing and allegations emerged that it was using distributor Philidor RX Services to inflate dermatology revenue.

Valeant has since cut ties with Philidor, which has gone out of business.

Valeant is under investigation by the U.S. Securities and Exchange Commission over its relationship with Philidor, Reuters has reported. The company is also the subject of U.S. state investigations for steep price hikes on some drugs.

Pearson said future price increases would be more modest.

Valeant on Tuesday forecast 2016 revenue of $11 billion to $11.2 billion, compared with its previous outlook of $12.5 billion to $12.7 billion.

The $1.5 billion cut reflected slower growth in the U.S. dermatology, gastrointestinal and women's health businesses.

Valeant reported unaudited fourth-quarter earnings of $2.50 per share, excluding special items, missing the analysts' average estimate of $2.61.

On that basis, the company said it expected earnings of $9.50 to $10.50 per share for 2016, down from its previous forecast of $13.25 to $13.75.

Analysts on average expected earnings of $13.24 per share for this year, according to Thomson Reuters I/B/E/S.

(Reporting by Rod Nickel in Winnipeg and Caroline Humer in New York; Additional reporting by Ankur Banerjee in Bengaluru; Editing by Ted Kerr, Lisa Von Ahn and Alan Crosby)