Can Valeant Go To Zero?
Can Valeant Go To Zero? by Dave Kranzler
Valeant (VRX) stock is now at $10. After a brief, Roman Candle launch to $260, $10 is the level where it traded in early 2009. It may be one of the few stocks that has gone back its financial crisis trading level. It is now likely on a long, slow death march to zero.
It was reported that Bill Ackman has completely liquidated his Pershing Square hedge fund position in VRX. Any institutional investment manager or pension fund who left its investment in Pershing Square long enough to see this happen should be investigated for breach of fiduciary duty. Ackman’s fund reportedly lost over $4 billion in VRX. I suspect that number was massaged to the low side for public consumption purposes.
I began to look at VRX with a fine-tooth comb just about 12 months ago. On March 15, 2016, I wrote: “The SEC Should Suspend VRX Trading: The Company Smells Like Enron.” The stock had dropped fro $260 to $37 in less than a year:
The initial triggers were concerns over the Valeant’s drug-pricing policies and questions surrounding its methodology for booking revenues. However, with just a casual “look under the hood” at VRX’s SEC-filed financials, there is likely a great deal of fraud lurking beneath what’s already been questioned. In fact, this is starting to smell a lot like Enron or Bear Stearns. The only component missing from this story is a CNBC rant from Cramer issuing a table-pounding buy on VRX stock. That may yet occur.
To begin with, the Company is carrying $30.2 billion in long term debt against just $9 billion of tangible assets. $39 billion of VRX’s assets is in the form of goodwill and intangibles. VRX’s self-assessed book value is $6.4 billion. But VRX’s tangible book value is negative $32.6 billion.
On March 18, 2016, I wrote: “Valeant (VRX): ‘Hope’ Is Not A Valid Investment Strategy,” after the stock had dropped another 28% from March 15th:
VRX will not default because the banks will grant as much leeway to VRX as is needed to keep the corpse alive. At this point in time, VRX’s assets likely are worth enough to cover the bank debt obligations. Just like a vampire would want to keep a body warm and the pulse ticking while sucking out the blood, the banks will hold up VRX in order to get as much money out as possible.
Of course, the longer this drags out, the uglier it will become for all economically interested parties. Because there’s accounting and disclosure fraud involved, we can expect the class-action shareholder lawsuits to pile up once the lawyers get a whiff of the blood being sucked out by the banks.Untitled
But keeping VRX alive for creditor purposes won’t help the stock. At this stage in the game, VRX stock will descend – sometimes quickly, sometimes slowly – below $10. In other words, VRX’s stock has entered the Irreversible Debt Spiral.
On April 5, 2016, I wrote: “Valeant (VRX): The Short Seller’s ATM Machine” after the stock popped up on news that an “internal review” showed that its books were clean. There’s that “hope” trade again:
The Company’s declaration that its financials are now valid is based on a review of the matter conducted by a committee that was composed of VRX’s board of directors. In no way can the case be made that this review was in any respect independent or “arm’s length.” This is another trait of a Company that is on the ropes: self-declared exoneration.
Without a doubt, the path of VRX’s stock to much lower stock prices will be littered with news-driven price-spikes like today. This is why VRX stock is a short-seller’s ATM. Every spike can be shorted for short-term profits. Make sure to hold on to some amount of a “core” position in order to profit from the next eventual new-driven waterfall. This is how similar stocks before VRX – like Enron, Bear Stearns, Countrywide FInancial, etc – traded until they finally dropped below $10.
Over the next few months I followed the VRX drama including its attempted asset sales. The Company was unloading “core” businesses for a fraction of the price it had paid for them over the previous few years. To this day I can not understand how: 1) Ackman continued to throw good money after bad in an attempt to prop up a house of cards and 2) how Ackman’s investors allowed him to continue throwing good money after bad. It only took one detailed review of VRX’s business history and 10-K to see that VRX was quite similar to Enron.
The Valeant saga is emblematic of the entire U.S. political, economic and financial system. The entire system is enveloped by the criminality of the people and entities running it – a criminality cloaked in catastrophically unpayable debt and now blatant fraud. It was a similar environment in this country when Enron imploded and those of us who understood what was happening had hoped that Enron would be the warning signal to everyone that would inspire the badly needed reform. Unfortunately, Greenspan inflated an even bigger fraudulent asset bubble than the one he had previously inflated that had led to Enron. You know the rest of the story from there.
Now our system is beset with a monetary and debt bubble that has inflated all asset classes beyond any conceivably recognizable “intrinsic” value. The Valeants and Enrons were fair warning and no one listened. The next collapse is going to dwarf the implosion of the two asset bubbles that preceded it. Fortunately, for those who are willing to “see” and accept this inevitable fate, gold and silver (precious metals) is the one asset class that has been fraudulently held down well below their intrinsic value.
If you are still holding on to some Valeant stock, let go of that insanely irrational “hope,” sell your shares and use the money to buy some gold and silver.