It is not much of a surprise that troubled pharma company Valeant Pharmaceuticals Intl Inc (VRX) has not had an easy time of late. The stock, once valued at over $250 in 2015, plunged after the bubble burst and has been steadily dripping since the beginning of this month following the departure of key investor and big-name supporter Bill Ackman. VRX is now trading at just $9 (having hit a 52-week low). And on April 12, top Mizuho Securities analyst Irina Rivkind Koffler reiterated her VRX Sell rating with a woeful $8 12-month price target on the expectation that FY17 guidance will be further reduced and that this will pressure share prices down even further.
Bearing all this in mind it may seem strange that there is still room for optimism. It can’t be denied that a bet on Valeant is more like a gamble than an investment. Nonetheless for investors happy to take a risk, the long-term returns on this stock could be impressive. And yes, while Ackman may be out, others are still in, see for example, the recent $32 million Valeant investment by Jeffrey Ubban’s ValueAct Holdings.
Here is why you, too, shouldn’t give up on Valeant just yet:
- Turnaround – The stock has been over-stigmatized by the pricing scandal back at the end of 2015. However, the market has not appreciated that since this date the entire management team has changed. The new team- who all have strong track records- and their focus on complete transparency, should provide reassurance to the market. For example, CEO Joe Papa has over 35 years’ experience in the pharma industry (vs ex CEO Pearson who came from a consultancy background) while CFO Paul Herendeen took just four years to de-lever Warner Chilcott from 8.4x Net Debt/EBITDA to 1.4x Net Debt/EBITDA. And for those who think Joe Papa’s consideration was excessive- note that the $62.7 million paid in 2016 includes a 4-year incentive plan and a $5 million mandatory purchase of VRX stock.
- Dealing with debt – The new management will have to change the business model of cheap loans and multiple acquisitions that created the Valeant bubble in the first place. And while they are doing this, they have VRX’s $30 billion debt mountain to deal with. The refinancing deal announced by VRX last month is a strong start in the right direction and will give Valeant much-needed breathing space as well as increased flexibility in asset sale negotiations: the company has extended the maturities of term loan debt until 2022 and this considerably reduces the debt that will mature in the next three years. In fact, the recent non-sale of Valeant’s Australian iNova business could be seen as a sign of strength that the company did not simply accept bids that fell short of expectations ($900m instead of the $1 billion-plus expected). The market should also be encouraged by Papa’s commitment to pay off $5 billion by 2018 (through, Papa says, improved operational results and the sale of non-core assets).
- Growth after 2017 – This year will be difficult for Valeant due to the expiration of exclusivity on key products. However, the outlook after 2017 is better with management forecasting growth for 2017-2020 of 4-6% for its Bausch + Lomb division, and 8-10% for both Branded Rx and Diversified Products. This projected growth is not reflected in current price which are closer to bankruptcy levels. Products to watch out for that could stimulate growth include Siliq for the treatment of severe psoriasis, Vyzulta for glaucoma, Oral Relistor and Xifaxan for IBS. Indeed, Siliq, which is set to launch in the second half of this year, could make $70 million for each 1% it can take of the $7 billion psoriasis market. The drug is much more effective than the current prime player Stelara, but its suicidal ideation risk may limit the scale-up speed.
Fifteen analysts have published VRX ratings in the last three months, TipRanks reveals. This breaks down into 3 buy, 9 hold, 3 sell ratings giving an overall analyst consensus rating of Hold. Due to plunging share prices, the average analyst price target of $14.82 is a whopping 64% above the current share price of just $9.02.