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Why Valeant Pharmaceuticals Is Down 10% Today

What happened

Following a decision by longtime investor and hedge-fund manager Bill Ackman to sell his shares in the struggling drugmaker, Valeant Pharmaceuticals' (NYSE: VRX  )  stock price was down 10% at 12:45 p.m. EDT today.

So what

At one point, Bill Ackman's massive bet on Valeant Pharmaceuticals was worth more than $5 billion. However, a seemingly endless string of bad news has caused Valeant Pharmaceuticals shares to lose more than 90% of their value since their peak. As a result, news that Ackman has sold his stock in Valeant at depressed levels suggests his loss on this investment could be north of $4 billion.

A frustrated investor holds his head in his hands in front of a chart showing a declining share price.

Image source: Getty Images.

As of December, Ackman's Pershing Square owned 18.1 million shares in Valeant, plus call options that represented another 9.1 million shares, according to Bloomberg. 

Ackman's selling is unexpected because he's remained a big advocate of the company during its decline. He's been instrumental in helping shape a restructuring so that Valeant can regain its footing, but now that he's sold his shares, Ackman plans on leaving Valeant's board of directors at the end of his term. 

Now what

Valeant CEO Joe Papa is an experienced veteran who's leading the company's turnaround, but he's navigating significant headwinds, and there's been little evidence of improving business conditions to reassure battered investors. 

Recently, the company reported fourth-quarter and full-year financial results showing sales continue to fall, and while the company is selling non-core assets to pay down debt, it's still got a lot of work to do. As of Dec. 31, the company's long-term debt totaled nearly $30 billion, and its interest expense to finance that debt was over $1.8 billion.

VRX Total Interest Expense (TTM) Chart

VRX Total Interest Expense (TTM) data by YCharts.

Because of the size and cost associated with its liabilities, Valeant's interest coverage ratio -- a measure of financial flexibility that's calculated by dividing earnings before interest, taxes, depreciation, and amortization (EBITDA) by interest expense -- remains poor. The ratio is below acceptable minimum levels, indicating that the company's ability to conduct transactions, such as acquisitions, is restricted, and it's dangerously close to default levels.

Management successfully renegotiated new terms on its secured debt that lowered its interest coverage ratio to 2-to-1 last August. However, 2017 guidance for EBITDA of between $3.55 billion and $3.7 billion means those levels might change somewhat. Valeant announced a debt offering earlier this month to help extend maturities, and that may give it some wiggle room, but rising short-term interest rates will push up LIBOR, and that's making its debt more expensive to carry.

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