Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has reported mixed first quarter earnings on May 9th, and the market is reacting positively to the news. This is, perhaps, the first positive earnings event since the company started its precipitous slide a couple of years ago. Valeant also increased its full-year guidance from $3.5-3.7 billion to $3.60-3.75 billion in adjusted EBITDA for the full year of 2017.

Highlights of the earnings result include revenue of $2.11 billion. This revenue number is down 11% YoY and missed estimates by $50 million. The top line earnings miss was driven by lower than expected Xifaxin revenue.  But as far as the market is concerned, the positives of Valeant’s result seem to outweigh the negatives. And the stock is reacting accordingly. Nevertheless, this earnings result doesn’t change the fundamentally negative situation of the company.

Segment Growth Profile

Bausch and Lomb, Valeant’s “durable growth” business was up around 4% (constant currency) as expected. Most of the growth came from the international portion of the business. But the reported growth -without adjusting for currency- was zero, probably because of exchange rate headwinds. The Branded Rx segment is down 9%, but Valeant managed to generate a 12% increase in adjusted EBITDA for the segment.

Note, the data for Branded RX still includes Dendreon, an asset Valeant divested. Interestingly, Dendreon was the only asset in Branded Rx that grew.  Revenue was up by 13%. Valeant managed to squeeze bottom line growth out of topline decline by dramatically reducing SG&A, R&D, and G&A in the Branded Rx segment. This strategy is not impressive, and it wouldn’t be surprising if the dramatic decrease in Valeant’s expenses are due to a lack of investment in Dendreon – an asset that arguably shouldn’t even have been included in the result.

In the Diversified segment, the bleeding was astronomical. Total segment revenue was -37% and adjusted EBITDA was down even more at -43%. Note, Valeant’s G&A expense didn’t decrease for this segment, and this is further evidence that the results from Branded Rx may be misleading because Valeant’s management could be playing games with its Dendreon accounting.

The Balance Sheet

Valeant’s income statement was bad, but everyone expected it to be bad, so it’s not a big deal as far as the stock price is concerned. Right now, the balance sheet is what is moving the market, and Valeant’s new CFO seems to have done an excellent job fixing both the company’s debt and liquidity situations. Cash and equivalents are up almost double from last quarter – but slightly down YoY. Total debt is $28,880m down from $32,309m in the first quarter of last year. This is impressive progress, but what is even more impressive is how the debt has been structured to reduce near-term risk.

Now, only $260m in mandatory paydown is due for the remainder of 2017, $846 million for 2018 and $346 for 2019! Valeant’s debt has become very manageable, but this data is also somewhat misleading because – unlike in prior reports – Valeant is only revealing the maturities without adding interest expense. After 2020, the debt obligations because extremely heavy ($3.5 to $5.9 billion each year on top of interest expense).

Conclusion

Investors can interpret Valeant’s first quarter earnings in whatever way fits their investment goals. The company has definitely rewarded earnings speculators who took bullish positions with call options, but at the end of the day, there is little sign of stabilization in the company’s top line, and the long-term prospects for the company remain uncertain.

 

Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.