Senator Sanders: You don’t need a Hearing When you can read Citron.
Valeant’s Business Model is Broken… Stock is Too Dangerous to Own: Short Term Price Target= $125
Over the past two weeks, shares of Valeant took a steep decline over concerns of price gouging that was recently expressed by Presidential hopeful Senator Bernie Sanders. In his plea for a subpoena of Valeant Sen. Sanders would like to see all communication regarding the price hikes and the reasons behind them. Look no further Senator — Citron has done the work.
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Before reading on, Citron would like to express one clear thought to the reader. The Valeant business model is broken and will fall under its own weight. Any kind of government intervention just expedites the inevitable.
Investors, Politicians, and Concerned Citizens must note that Valeant raised the prices on the two key heart drugs in question the very next day after they acquired them … just to cover up for a bad quarter. Here’s the proof — all done without wasting taxpayer money on a hearing.
We can tell you all with impunity what the Valeant CEO to CFO email about Q1 2015 said…
On February 10, 2015, Valeant closed on its acquisition of Marathon’s drug assets, including Isuprel & Nitropress.
That same day Valeant increased the price of Isuprel by 525% and Nitropress by 212%.
CEO Pearson even admitted on the Q1 conference call that the price hikes were implemented immediately. Pearson:
Mike Pearson: “…in terms of the price increases, on the two products you mentioned [Isuprel & Nitropress], the company that sold to us [Marathon] had done some pricing work and had identified the opportunities. They had a consultant come in. Those happened immediately…”
Then voila, in VRX’s 1Q15 earnings slides (slide 9), despite the small size of the acquisition price, these drugs miraculously leapfrog all of VRX’s thousands of products to take two of the top three slots – Isuprel is VRX’s single largest drug in Q1 2015 and Nitropress is #3 (tied with Jublia)
Valeant discloses Isuprel and Nitropress sold $72M and $62M, respectively, in 1Q15 revenue. Citron broke out some algebra to calculate the impacts of these drug price hikes on Valeant’s Q1 earnings, which beat consensus by 2c. We conservatively assume these are the revenues for the full quarter. (It was Marathon’s revenue prior to the close of the product transfer …)
(But if this supposition is wrong, and Valeant is reporting these revenues for only the 49 day stub period, the effect of these price hikes on their quarter is even more extreme. )
So how much revenue did Valeant gain from jacking prices on just these two drugs?
There were 89 days in 1Q15. Valeant owned Isuprel and Nitropress for 49 of the 89 days of the quarter and the prices of the drugs were 525% higher and 212% higher during this 49 day period than during the first 40 days of the quarter prior to VRX buying them.
The calcs show this February 10, 2015 price increase on just these two drugs netted Valeant an additional $86.95 million revenue that flowed straight to its bottom line — and that was only during the last 49 days of the quarter.
This $86.9M represented 8.5% of Q1 2015 adjusted EBIT and 10.5% of Valeant’s cash EPS metric.
If Valeant had not taken these price increases, it would have missed the Q1 2015 Street consensus EPS estimate by 9.22%.
Here’s the math:
Q1 2015 cash EPS reported by Valeant : $2.36
Q1 2015 sell side consensus cash EPS estimate): $2.32
Q1 2015 cash tax rate: 2.2% (= ($80.9M – $62.6M) of cash taxes/($155.4M + $673.0M) of adjusted pre-tax income, from Q1 2015 earnings release
Cash impact of 85.03 million / 343.4 million shares = $ .248
(Company reported 3c of debt and share impacts of transactions.)
So there’s your answer, Senator Sanders, in black and white. The extreme price hikes on these two drugs were the only reason Valeant beat the Street on Q1 2015 estimates, avoiding a 9%+ earnings miss. This is what you will see if you ever get ahold of the emails between the CEO and CFO.
It should be noted that this is in complete contradiction to EVERYTHING CEO Pearson tells Wall Street: That his business model is not dependent on price increases.
The Valeant Chronology
The current controversy about Valeant’s drug price hikes and its stock valuation did not begin when rogue hedge fund / biotech startup dude Martin Shkreli burst upon the scene last week. In 2014, noted shortseller Jim Chanos, most famous for his lone public call-out of Enron, called this stock “a rollup that isn’t growing organically” and described its strategy as laced with “aggressive accounting games”. It’s pretty typical that when short-sellers notice accounting “issues”, it’s always a year and a half or two before Wall Street catches on.
“Valeant is a house of cards”
Note: These aren’t our words.
See full PDF below.