What's going on?
Troubled drugmaker, Valeant Pharmaceuticals, had a rough few days: it cancelled a scheduled call to discuss its earnings, it removed its official guidance for 2016 profits and its CEO returned from medical leave. It was also announced that it’s under investigation by the Securities & Exchange Commission (SEC). The stock fell 18% to a 3-year low!
What does this mean?
The SEC has asked for information about Valeant’s relationship with drug distributor Philidor. As we reported back in October, an investment firm had questioned the legality of Valeant’s accounting with regards to Philidor (it was called a “pharmaceutical Enron”). The scrapped earnings guidance is another bad sign. To put it lightly, there is a huge amount of uncertainty now surrounding the company – and investors tend to dislike uncertainty.
Why should I care?
For the stock: This is hurting some high profile hedge funds. Valeant had spectacular returns until August 2015, but it is down 75% since then. It’s owned by a number of high profile investment funds, whose returns have suffered as a result. But at least one of them is standing by its investment and believes these issues will be sorted out in a matter of weeks.
The bigger picture: Valeant’s formerly profitable business model is under major threat. It’s one of many firms that often purchased niche drugs that treated, say, a rare disease. It then would increase the price of that drug and reap the benefits. But following political pressure, that model is disappearing.