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Valeant’s woes could prompt sale of B&L

Part of Bausch & Lomb Inc.—or the entire business—soon could be on the block again.

After hedge fund manager William Ackman’s declaration two weeks ago that divesting a portion of the eye care company could help solve problems faced by Bausch & Lomb parent Valeant Pharmaceuticals International Inc., a sale of some or all of the business is more likely than not, Brighton Securities Inc. Chairman George Conboy believes.

Ackman, who as CEO of Pershing Square Capital Management L.P. controls 9 percent of Valeant’s shares, stated that selling part of Bausch & Lomb could be the cure for a cascade of ills that have plagued Valeant for months.

“Bausch & Lomb is a very valuable standalone business and someday, if Valeant chose to, they could sell a piece of that to pay down their debt,” Ackman told attendees of a March 9 charity event packed with Wall Street movers and shakers.

Steep drops in Valeant’s stock price over the past six months have been a major contributor to Pershing Square’s own sharp declines

In its Aug. 13, 2015, weekly report to investors, Pershing Square Holdings Ltd.—for which Pershing Square Capital Management serves as investment manager—reported a net asset value of $28.60 a share. In a March 15 report, it stated its net asset value at $15.42, a 44 percent decline. That same day, Ackman sent an email to Pershing Square investors lamenting recent declines in Valeant shares’ value and promising to “take a much more proactive role at the company to protect and maximize the value of our investment.”

Not everyone sees a Bausch & Lomb sell-off as inevitable, however.

“If you’re a good negotiator, you don’t signal what you’re doing,” Bullfinch Funds President Christopher Carosa said.

Ackman’s declaration could be the Wall Street equivalent of a head fake, a negotiating ploy meant to throw off possible buyers of some other Valeant unit he really means to sell, Carosa added. 

A Bausch & Lomb sale might not be inevitable, Conboy conceded. But that Valeant—and, by extension, Bausch & Lomb—is in for a rough ride would seem to be a virtual certainty.

Falling as low as $26 a share early this week, Valeant stock (NYSE: VRX) has seen a roughly 90 percent drop from its $252.62 peak last August.

The plunge in Valeant’s share price has come amid a constellation of woes, troubles that have been building since last year. They include:

  • a Securities and Exchange Commission probe of accounting irregularities;
  • Justice Department and congressional investigations of the firm’s pricing policies;
  • a Federal Trade Commission probe of possible antitrust violations related to Bausch & Lomb’s contact lens business; 
  • the possibility that Valeant could be forced into default on some bond covenants. 

Further roiling Valeant’s waters this week was the announcement that CEO Michael Pearson would depart as soon as the company’s board hires someone to succeed him and that Ackman, who in the March 9 speech also raised the possibility of a management shakeup at Valeant, would be joining its board.

The SEC probe centers on accounting questions related to Valeant’s now-severed relationship with Philidor Rx Services LLC, a Pennsylvania-based specialty pharmacy Valeant helped run and had planned to acquire as a wholly owned subsidiary.

Valeant revealed that the SEC had subpoenaed its records after canceling a previously scheduled earnings call and announcing it would delay release of its 2015 annual report due to Philidor-related accounting issues.

The company stated in an SEC filing Monday that it determined Philidor-related misstatements would require it to shave $58 million off previously stated 2014 revenue and $33 million or 9 cents a share off that year’s earnings. The 2014 revenue cut would not add to 2015 revenue because the company had already booked it in 2015, the filing added.

Investors would not necessarily be fazed by adverse publicity including allegations of price gouging or antitrust violations, Conboy said.

“What they will not forgive is cooking the books, and it looks like they could have been cooking the books,” he added.

Failure to file its 2015 10-K by April 29 would put Valeant in default on some bond obligations, the firm revealed in an SEC filing last week. Company officials believe it is on track to meet that deadline, the company stated in the Monday filing. 

A onetime McKinsey & Co. consultant, Pearson until recently won Wall Street plaudits for devising a strategy of acquiring pharmaceutical firms with mature product lines and marketable new products in their pipeline, cutting their expenses with staff and research and development reductions.

He is not winning much praise from Valeant’s board now. 

“The company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition,” Valeant said in the March 21 SEC filing announcing Pearson’s impending departure.

Also out of favor is former Valeant chief financial officer Howard Schiller, whom the board had tapped to serve as interim CEO during Pearson’s recent medical leave.

“The improper conduct of the company’s former chief financial officer and former corporate controller, which resulted in the provision of incorrect information to the (board finance) committee and the company’s auditors, contributed to the misstatement of results,” Valeant stated in the March 21 SEC filing.

Schiller has held a seat on Valeant’s board since his mid-2015 retirement as CFO. He rebuffed the board’s invitation to resign the seat this week, stating that he does not think he has done anything wrong.

Recent events show at least for the time being Ackman will be steering Valeant’s course, Conboy said.

Coming 11 days after Valeant directors announced the addition of Pershing Square vice chairman Stephen Fraidin to their ranks, Ackman’s election gives Pershing Square two seats on the Valeant board.

“We look forward to Bill Ackman’s perspective and contributions as a new member of our board and one of Valeant’s largest shareholders,” Valeant chairman Robert Ingram said.

If Valeant does sell off all or part of Bausch & Lomb, it would be the third time in eight years the company has changed hands. It was acquired by the private equity firm Warburg Pincus LLC in 2007 and sold to Valeant in 2013.

Once considered along with Eastman Kodak Co. and Xerox Corp. as one of the three pillars of the area’s economy, Bausch & Lomb with 880 local workers ranked as the region’s ninth largest manufacturing firm on the Rochester Business Journal’s Aug. 21, 2015, list.

A decade earlier, it ranked as the area’s seventh largest private-sector employer, with 3,500 workers locally.

If part of Bausch & Lomb does go on the market, Conboy said, two possible types of buyers are likely to be interested: pharmaceutical firms and private equity buyers.

The latter would be better for the local economy, he believes.

As did Warburg Pincus, a new private equity owner would likely make investments to try to  boost the eye-care company’s value, making the firm more attractive to a buyer or in better shape for an initial public offering, Conboy explained.  

A pharmaceutical firm would be more likely to fold the firm’s operations into its own, further diminishing Bausch & Lomb’s already reduced local presence, he added.

A third but less likely possibility might be a sale of Bausch & Lomb’s relatively healthy contact lens division, which has manufacturing operations at the eye-care company’s 1 million-square-foot Goodman Street complex.

One buyer that Conboy thinks could be interested in such an acquisition is Cooper Cos. Inc. Its CooperVision Inc. contact lens division already employs some 1,200 at shipping and manufacturing sites in Monroe County.

Cooper Cos. is in good shape financially and might well be able to swing such a purchase. Whether it would be interested and whether Valeant would put the contact lens division on the block are unknowns.

“It’d be great for Rochester,” Conboy said. “But it would probably be a long shot.”

3/25/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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