Greenberg: Valeant Claims Critics Use ‘Wrong Assumptions’

SAN DIEGO (TheStreet) -- In a letter to employees filed with the SEC Thursday, Valeant Pharmaceuticals' (VRX) CEO Michael Pearson claimed critics are using "the wrong assumptions" as they analyze the company.

Wrong assumptions. Really? That's like a company telling a reporter or analyst, who pushes too hard, that they're asking the "wrong" questions. (Which, in general, usually means they're the right questions.)

From the letter:

Our actions have generated a lot of attention from the media, and we expect this transaction will continue to be the focus of many press reports. Unfortunately, some of these reports have criticized our overall business model and raised questions about our approach to R&D. We disagree with these criticisms and they are often based upon wrong assumptions, and we have been setting the record straight with facts about our operating model and the performance of our businesses.

At the risk of making the wrong assumptions -- and I do not believe I am, as I wrote in January when I red-flagged Valeant: Despite its claims to the contrary, Valeant is a rollup revolving around the idea of stripping away R&D costs for instant bottom line results. (And that's before getting into the wonderful world of acquisition accounting.)

The letter goes on to say:

We continue to believe that innovation is critical for the future of healthcare and the success of Valeant. The source of that innovation, however, has shifted dramatically over time and Valeant's output-driven approach to R&D is on the forefront of this shift. We support lower-risk projects, like line extensions and new indications, and our portfolio prioritization is determined through rigorous and unbiased peer scientific review.

Again, at the risk of making the wrong assumption, what the company is really saying is that "innovation is critical" as long as it isn't started at Valeant.

The letter goes on to say:

This output-driven approach has been incredibly successful, delivering more product launches than most of our competitors without sacrificing quality or likelihood of approval.

Again, at the risk of making the wrong assumption -- "more product launches," but . . . this is a company that can only lay claim to so many launches because it bought the companies that did the R&D.

The letter goes on to say:

The success of this approach was validated most recently on Friday, when the FDA approved JUBLIA for the treatment of onychomycosis, a product we acquired from Dow Pharmaceutical Sciences in 2008 and advanced from pre-IND stage through all three clinical phases.

Again, at the risk of making the wrong assumption -- oh, please! This was part of a product line the company bought back before it merged with Biovail; now that it's approved, the question is: How will it sell?

Reality (again, at the risk of making the wrong assumption): Everything Valeant says is brilliant on paper, less so in practice. Trouble is, it is now hooked on the acquisitive drug, and like most rollups it's unlikely that it can get off gracefully without either a) sending its real growth into toxic shock or b) taking a scalpel to itself and selling off everything that isn't nailed down, in which case its entire strategy would have been a sham. (The latter would not appear to be totally out of the question given Pearson's concession, as I wrote here, of a $150 billion mistake.)

Valeant is at a "between a rock and hard place" in its history. As Gimme Credit's Vicki Bryan writes in a report to clients:

Valeant pays high multiples to buy companies and has spent and written off billions of dollars in restructuring charges, integration expenses, and asset value write-offs--which means the company has generated a cumulative net loss of over $1 billion since 2007 despite netting substantial gains from offshore tax inversion and growing annual revenue 7 fold to more than $6 billion. It also has layered on astronomical extra debt of $16.7 billion (and counting) which resulted in now more than $1 billion a year in interest costs plus one of the weakest credit profiles by far of any major drug company.

It could tag on another $17 billion in debt if it wins its hostile bid for Allergan, but that deal is far from certain. If it doesn't happen, and soon, Valeant's forward momentum could stall abruptly along with its mystique as persistently deteriorating core performance fills center stage. 

No easy way out, it appears. Assuming, of course, my assumptions aren't wrong. 

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-- Written by Herb Greenberg in San Diego

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at herbonthestreet@thestreet.com.

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