Pershing Square Broken to Pieces on the Valeant Catherine Wheel

This stock is like a torture device. I’m assuming most of you are familiar with the Catherine Wheel, yes? It was a device that was used to exact extreme punishment unto those who deserved it, vagabonds, petty thieves, rapists and the like. The way it worked was pretty straight forward. The criminal was tied to a large wooden wheel, spread eagle, with arms and legs fully extended. The executioner would club the prisoner about his bones, go back to the pub for a few pints, then revisit the doomed to club some more. This process would carry about for hours, until the prisoner expired.

VRX is Bill Ackman’s Catherine Wheel. His losses in the pre-market are upwards of $200 million. The news is grim.

Reports Q4 (Dec) earnings of $2.50 per share, $0.12 worse than the Capital IQ Consensus of $2.62; revenues rose 22.3% year/year to $2.79 bln vs the $2.76 bln Capital IQ Consensus.

• Co lowers guidance for Q1, sees EPS of $1.30-1.55 (Prior $2.35-2.55) vs. $2.66 Capital IQ Consensus Estimate; sees Q1 revs of $2.3-2.4 bln ($2.8-3.1 bln) vs. $2.85 bln Capital IQ Consensus Estimate.
• Co lowers guidance for FY16, sees EPS of $9.50-10.50 (Prior $13.25-13.75) vs. $13.48 Capital IQ Consensus Estimate; sees FY16 revs of $11.0-11.2 bln (Prior $12.5-12.7 bln) vs. $12.54 bln Capital IQ Consensus Estimate.
• The co also offered guidance for the next four quarters (2Q16 – 1Q17), saying it expects revs to be $11.6-11.8bln,

  and EPS of $10.75-11.25

• “The challenges of the past few months are not yet behind us and our goal for 2016 is to better balance our priorities across all of our constituencies – physicians, patients, employees, payors, debt holders and shareholders…In discussion with the Board, we have assumed lower growth in our U.S. dermatology, gastrointestinal, and woman’s health portfolios, as well as certain geographies like Western Europe, while keeping our expenses largely unchanged. We plan to work hard to improve these metrics by delivering higher revenues and reducing our costs and, if successful, we hope to beat this guidance in the quarters to come. In the meantime, we are comfortable with our current liquidity position and cash flow generation for the rest of the year, and remain well positioned to meet our obligations.”
• • Due to the ongoing review of company financials, we cannot provide certain comparative metrics that we have historically provided;
    • Metrics we cannot provide: Organic Growth; Business Unit Growth; Price/Volume
  • Under new tax reporting:
    • Q1 EPS guidance is $1.18-1.43 ($1.30-1.55 under old method) vs. $2.66 consensus.
    • FY16 EPS $8.50-9.50 ($9.50-10.50 under old method)  vs. $13.48 consensus
  • Lower revenue trajectory on key businesses
    • More conservative forecasting on Dermatology and Gastrointestinal growth
    • GI: timing and impact of additional sales team and coverage
    • Dermatology: timing and uptake of patient access program
  • Continued growth in Contact Lens, Dentistry, Oncology, Generics, and Eastern Europe, Asia (Emerging Markets)
  • Several businesses off to slow starts: Western Europe, Ophthalmology Rx, Solta, and Obagi
  • Walgreens off to a good start: Walgreens ~30% of total dermatology volume • Brand for generics program on track to launch this summer
  • Given significant reduction in revenues, work needed to align cost base
  • Continued focus and improvement on patient access
  • Co is restructuring smller business and exploring target divestitures of non core assets