As if declining EBITDA, political pressure, and debt were not bad enough, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) must contend with the risk of adverse litigation from opponents as varied as the government, investors, and even its former CEO, Mike Pearson.
Lawsuits are a normal part of doing business and usually don’t factor into the long-term thesis for a stock. But adverse litigation is an existential threat for a company in Valeant situation. Near-term debt obligations are greater than free cash flow, and total equity value is only 1/10th enterprise value. Valeant may be unable to survive an expensive legal setback.
The embattled drug maker holds cash and equivalents of only $543 million. And this is not enough protection against a plethora of monetary fines and penalties that may run into the billions.
Overview of Valeant’s Major Legal Challenges:
- Valeant faces a laundry list of federal and state investigations relating to pricing policies, the relationship with Philidor, accounting practices, and transparency with the SEC. These investigations are innumerable – as is their potential cost if Valeant is fined or made to pay damages for all of them.
- Valeant and Bill Ackman, formerly the largest shareholder in the company, are embroiled in a class-action lawsuit. The pair is accused of illegal insider trading during Valeant’s failed attempt to acquire Allergan in 2014. Valeant is expected to bear the majority of damages if the pair is found liable.
- Former investors in Sprout, the developers of Addyi, a business acquired by Valeant in 2015, are suing Valeant over failure to properly commercialize their female libido drug. These investors were promised royalty fees as part of the acquisition deal with Valeant.
- Valeant is being sued by Mike Pearson, its controversial Ex-CEO who, by the way, is responsible for the mess the drug maker finds itself in. Pearson claims Valeant owes him around 3 million shares of stock in addition to unpaid consulting fees.
Valeant’s legal proceedings, like all legal proceedings, can go either way. It is unlikely for all the cases to go against Valeant. For example, the Sprout case looks ridiculous and probably won’t make it far in court. But some of Valeant’s other lawsuits are much more serious. The insider trading case, in particular, looks unwinnable.
Valeant planned to take over Allergan by instructing Ackman to buy up enough shares in Allergan to swing the board in Valeant’s favor with voting power. When the takeover failed, and Allergan was bought by a different company, Ackman sold his shares for a massive profit. That looks like a clear example of insider trading that will result in a penalty. Ackman’s fund has warned his investors about this risk.
The numerous government investigations are also likely to result in significant monetary damages. Valeant is a complex company with many questionable practices. Philidor is not its only strange business relationship.
All in all, Valeant will probably lose many of its legal proceedings and be required to pay significant monetary damages. Such damages could reach billions and represent an existential threat for the struggling pharmaceutical company. Valeant’s stock should be avoided in light of these and other concerns.