Valeant’s Strengths Are Laced with Challenges

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) delivered a sound second-quarter print yesterday before the bell- but the troubled biotech giant is not quite unshakable just yet, even if it is on the mend to recovery.

Canaccord analyst Neil Maruoka is pleased that Valeant met his revenue expectations while outclassing both his expectations as well as consensus with adjusted EBITDA. For Maruoka, it boils down to questions of lofty leverage and whether signs of meaningful operating trajectory can sway him from the sidelines.

For now, the analyst persists from a cautious vantage point, reiterating a Hold rating on shares of VRX with a $14 price target, which represents an 8% downside from where the stock is currently trading. (To watch Maruoka’s track record, click here)

For the second quarter, the giant reached $2.23 billion in revenue, just ahead of the analyst’s projection of $2.20 billion while matching the Street. Though Bausch & Lomb saw a 17% international surge with Salix experiencing a 16% year-over-year rise thanks to slight price lifts for gut drug Xifaxan- Valeant’s not-so-secret weapon and leading drug on slate. However, the analyst spots “some areas of weakness” afoot for Valeant, including the dermatology segment, which witnessed a 31% annual decline as well as forthcoming loss of exclusivity (LOE) for Syprine and Isuprel.

Meanwhile, a strong asset in Valeant’s corner is adjusted EBITDA, which stormed in with $951 million juxtaposed against the analyst’s forecast of $929 million and the Street at $910 million. Though gross margin did not perform as strongly as Maruoka had expected, he sizes up an offset when eyeing dipping operating expenses.

Though the VRX team “holds EBITDA guidance steady,” the analyst would not be surprised to see this curtailed at some point before the year’s end. Revenue did see a cut, falling from a previous guide of $8.9 to $9.1 billion down to $8.7 to $3.89 billion, which aligns with the analyst’s and consensus expectations. Worthy of note, Valeant sold iNova and Obagi segments this quarter, and revises outlook does not currently factor in the loss of EBITDA from these businesses.

Maruoka notes, “While we are encouraged by the further stabilization of Valeant’s business and evidence of growth from both Bausch & Lomb and Xifaxan, we are not necessarily convinced that we are seeing significant operating momentum for the company. Moreover, we view the receipt of a Complete Response Letter (CRL) for Vyzulta to be disappointing, likely further delaying the launch of this potential growth driver.”

Moving forward, the analyst keeps his eyes peeled to steep leverage as a crux in Valeant’s bigger picture, calculating that with debt repayment last quarter, VRX’s leverage ratio has seen just a slight decrease, “[…] reflecting the challenges of de-levering through divestitures. The company does not have any maturities until 2020, providing flexibility as it looks to further reduce debt levels. And, while the stock has been bolstered recently by speculation of a potential debt-for-equity swap, we believe there is considerable uncertainty on what this could look like or whether a transaction could have a meaningful impact on Valeant’s leverage.”

TipRanks analytics exhibit VRX as a Hold. Out of 14 analysts polled by TipRanks in the last 3 months, 3 are bullish on Valeant stock, 8 remain sidelined, and 3 are bearish on the stock. With a return potential of nearly 10%, the stock’s consensus target price stands at $17.15.

Kite is Leaping Across to the Finish Line 

Kite Pharma Inc (NASDAQ:KITE) shares rose close to 6% yesterday after investors were delighted to hear the biotech firm will not be needing an FDA panel for refractory aggressive non-Hodgkin lymphoma (r-NHL) drug axicabtagene ciloleucel (axi-cel).

Canaccord analyst John Newman joins with bullish accolades, noting that rival Novartis did participate in an FDA panel, but wagers that the agency has such positive conviction in Kite, the panel was stricken from the table.

In reaction, the analyst has become all the more enthusiastic on Kite’s prospects for Axi-Cel, maintaining a Buy rating on the stock while boosting the price target from $115 up to $120, which aligns with where the shares last closed. (To watch Newman’s track record, click here)

Newman commends Axi-Cel’s exciting strides forward, explaining, “We view this as a positive, since it suggests that the FDA has high confidence in KITE’s data. Currently, KITE’s submission of axi-cel to the FDA is under review with a PDUFA action date of November 29, 2017. KITE management has indicated the company is actively engaging payors to ensure access to axi-cel for patients. Given that KITE has been preparing for the launch for the past 18 months, we KITE should be in good shape for the roll-out.”

Now seeing more upside for Kite “[…] based on expectation for FDA approval for axi-cel in R/R DLBCL by YE17, and a successful launch in 2018 (thereby reducing the risk premium we assign in our valuation model),” Newman concludes, “We expect limited competition for KITE during its product launch because we do not expect any off-label use for CART products outside of their approved indications. Furthermore, we are highly encouraged by the earlier-than-expected commercialization activities in EU, which should help facilitate greater EU market share growth going forward.”

TipRanks analytics demonstrate KITE as a Buy. Based on 10 analysts polled by TipRanks in the last 3 months, 6 rate a Buy on Kite stock, 3 maintain a Hold, while 1 issues a Sell. The 12-month average price target stands at $91.00, marking a 24% downside from where the stock is currently trading.