Valeant Pharmaceuticals Intl Inc (VRX): Weaknesses Still Linger After the Solid 3Q Show

Ram Selvaraju needs to see more proof of VRX's pipeline staying power and ability to yield gains.


Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares are up nearly 30% this week as the biotech giant tried to shake off the troubled ghosts of its past with a strong third quarter showing. Yet, are all of Valeant’s old threats in the clear?

H.C. Wainwright analyst Ram Selvaraju writes no, even if “organic growth [is] slowly returning,” even with a “relatively” robust quarterly performance, “some challenges remain” to haunt Valeant.

As such, the analyst maintains a Neutral rating on VRX stock with a price target of $17, which implies a close to 11% increase from where the shares last closed. (To watch Selvaraju’s track record, click here)

For the third, quarter, Valeant posted $2.22 billion in revenue, which did not quite meet the analyst’s forecast calling for $2.25 billion, but did “handily” beat his bottom-line estimate of a GAAP net loss per share of $1.01, with Valeant showing $3.71 in basic GAAP EPS and $3.69 in diluted GAAP EPS. The analyst believes VRX’s earnings benefited from a $1.7 billion income tax benefit. Valeant saw adjusted net income (non-GAAP) of $367 million in its third quarter coupled with $940 million in GAAP cash flow from operations with $951 million in (non-GAAP) adjusted EBITDA.

For the year, the VRX team adjusted its prior revenue guide of $8.7 billion to $8.9 billion up to $8.65 billion up to $8.8 billion while maintaining its EBITDA outlook. R&D expense outlook has been dialed back from $420 to $435 million down to $370 to $400 million.

Sure, “B+L continues to shine,” which the analyst praises as Valeant’s “most stable and durable division” of all, comprising of 57% of its revenue gains this last quarter. However, Selvaraju concludes his research on a note of caution for the biotech giant: “While there was evidence of organic growth within the Bausch & Lomb (B+L) and Salix (gastroenterology) divisions, we note continued evidence of weakness in the branded neurology prescription products business and anemic revenue in the Global Consumer business, where revenue decreased by 2% vs. the year-ago period. While there appears to be negligible immediate-term debt default risk, in our view the principal headwinds remain: (1) potential near-term impairment charges related to write-offs of in-process R&D and write-downs of intangible asset values; (2) losses of exclusivity (LOEs) on various branded products, including agents like Apriso and Uceris within the gastroenterology business unit; and (3) possible costs related to legal settlements. While awaiting further evidence of Valeant’s pipeline strength and ability to generate top-line growth with new product launches.”

Wall Street tends to side with this analyst’s apprehensive attitude toward the stock, as 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, while 3 are bearish on the stock. With a return potential of 26%, the stock’s consensus target price stands at $19.36.  

  • Yves Vanhi

    When you look at the charts, everything is pointing to a strong upside reversal. When you hear the news, you can only admit that we have seen a slow, then increasingly positive flow as well, the last events pointing to an increase in sales, recent FDA approvals and then the sale of their Obagi product line at a very decent price. So when I read news like this I become immediately suspicious: there IS undoubtly a remaining herd of shorts that need the price to continue down…

    • disqussucksshowsfullname

      Take note that a lot of shorts opened/added positions from $14 to $8 around the time that bill ackman capitulated, betting on Bankruptcy.

      Some might be holding positions currently underwater and closing their huge positions might mean making the stock jump because the number of shares in the market is really low at only 350m shares (it traded 60m shares last tuesday which shows how little you need to make the stock move).

      Their short attack failed because they only added to their position, but the corresponding reversal from covering is more (the short attack started from 14.50 to 11.50, and the reversal was from 11.50 to 15.50). And the bad part is that the newly initiated shorts are not yet fully covered.

      Joke’s on the shorts now eh?