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What's going on?
Valeant Pharmaceuticals, the embattled drug company that used to be a favorite investment of some of the worlds biggest hedge funds, is having a terrible time: its shares dropped 50% on Tuesday as it warned it could default (which means, sort of, that it could go bankrupt).
What does this mean?
Every publicly-traded company must file financial results that have been signed off by an accountancy firm. Questions arose late last year regarding how Valeant accounted for revenue, specifically, from one its formerly large clients. So far, Valeant and its accountants havent been able to get to the bottom of things. If an audited report isnt produced by (roughly) the end of April then Valeant could be in default. The process has been complicated by the fact that Valeants CEO had to take a medical leave of absence and only returned to his role two weeks ago. Valeants stock was worth $262 in August 2015. Prominent hedge funds, such as Pershing Square, were large investors which gave the company somewhat of a darling status on Wall Street. Since that peak, the stock is down about 85%.
Why should I care?
For markets: Markets hate uncertainty and theres a lot of that with Valeant. In almost every scenario where there is a large, unquantifiable risk, the value of the investment in question will fall sharply in value. Stock prices usually reflect the markets assessment of the probability of certain outcomes but when its impossible to make that calculation, investors head for the exits. Valeant is in a very uncertain position right now and its stock price is reflecting that.
The bigger picture: Valeant has a lot of debt and thats bad for stock owners. Valeant has more than $30 billion of debt outstanding. In any company, bondholders have seniority over shareholders: they get to own the company when the bad stuff hits the fan (i.e. when the company goes bankrupt). That would leave stockholders with worthless stock. So remember: it makes sense to analyze how much debt a company has before buying stock in it.
Originally posted as part of the Finimize daily email.
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