The Valeant saga has yet to play out, but investors are right to be skittish. The company cannot conceivably continue on its acquisition spree with its stock price in free-fall; what potential target would accept it as currency? In the meantime, Valeant is now encumbered with in long-term debt, equal to roughly five times the amount of shareholders’ equity. The other leg to the Valeant story—its ability to continue raising the prices of the drugs it acquires—is also now on shaky ground. Presidential candidates on both sides are vocally expressing their disdain for the practice, and the issue has crossed into the mainstream. In the current politicized environment, it is inconceivable that Valeant and other drug companies will enjoy the same latitude to hike prices as it has over the last four years. Whether or not investors are directly exposed to the maelstrom surrounding Valeant, we all have something at stake. Should it turn out that the company is guilty of more than just free-wheeling accounting, the impact on all U.S. stocks will be negative. Episodes surrounding the likes of Tyco, Enron, and Worldcom after the turn of the millennium fed into broader distrust of the stock market and helped prolong the bear market that had originally started with the dot-com bust. The same could be said about the many banking and trading scandals that were unearthed after the fall of Lehman. Valeant’s epic share price decline may not affect your portfolio directly, but a reversal in overall market sentiment absolutely will.
The Valeant saga has yet to play out, but investors are right to be skittish. The company cannot conceivably continue on its acquisition spree with its stock price in free-fall; what potential target would accept it as currency? In the meantime, Valeant is now encumbered with in long-term debt, equal to roughly five times the amount of shareholders’ equity. The other leg to the Valeant story—its ability to continue raising the prices of the drugs it acquires—is also now on shaky ground. Presidential candidates on both sides are vocally expressing their disdain for the practice, and the issue has crossed into the mainstream. In the current politicized environment, it is inconceivable that Valeant and other drug companies will enjoy the same latitude to hike prices as it has over the last four years. Whether or not investors are directly exposed to the maelstrom surrounding Valeant, we all have something at stake. Should it turn out that the company is guilty of more than just free-wheeling accounting, the impact on all U.S. stocks will be negative. Episodes surrounding the likes of Tyco, Enron, and Worldcom after the turn of the millennium fed into broader distrust of the stock market and helped prolong the bear market that had originally started with the dot-com bust. The same could be said about the many banking and trading scandals that were unearthed after the fall of Lehman. Valeant’s epic share price decline may not affect your portfolio directly, but a reversal in overall market sentiment absolutely will.
The-stock-that-ate-Wall-Street.docx