Is There Still a Glimmer of Hope for Valeant Pharmaceuticals Intl Inc (VRX)?

BMO stays on the sidelines as VRX still faces headwinds, but praises key "headway" in growth.

Just one week ago, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) unleashed a third quarter turnout that stirred up renewed Street excitement on a story that has been held back with debt woes and major legal drama. Is this giant finally ready to make a comeback?

BMO analyst Gary Nachman is not budging from the sidelines, but gives the company kudos for an impressive third quarter that beat out Street-wide expectations.

On the heels of an encouraging third quarter, the analyst reiterates a Market Perform rating on VRX stock while lifting the price target from $16 to $17, which represents a 16% increase from where the shares last closed. (To watch Nachman’s track record, click here)

For the third quarter, thanks to strength in the international Bausch & Lomb business along with Branded Rx, Valeant brought in a revenue outclass of $32 million, which more than made up for US Diversified that came up short of expectations. Additionally, Valeant’s $0.16 EPS outperformance benefited from a $57 million pullback in Operating Expenses that meaningfully offset a dip in gross margin. The international Bausch & Lomb segment and Salix both yielded 6% organic growth in the quarter, which Nachman notes “may have some legs with renewed efforts there, although the 34% decline for US Dermatology is concerning despite management’s commentary that there has been some pricing stabilization there.”

LOEs are anticipated to make up for around $525 million of revenue with $465 million of profit for this year, which notably follows a dip from $1,043 million of revenue and $942 million of profit delivered last year. These LOEs “are likely to decline meaningfully going forward and will remain a headwind,” adds the analyst, who predicts: “Pipeline execution remains key to sustaining growth in core franchises, including the ongoing Siliq (psoriasis) launch, upcoming Vyzulta (glaucoma) launch in 4Q, and potential approvals/launches of Luminesse (ocular redness, PDUFA 12/27/17) and IDP-118 (psoriasis, PDUFA 6/18/18); we remain cautious on the extent of uptake from these new launches.”

In reaction to the “solid execution” seen in the biotech giant’s third quarter “with beats on both the top and bottom line,” the analyst is taking up his revenue expectations accordingly. In Branded Rx, the analyst is “more bullish on Salix and Dentistry, but more cautious on US Dermatology.” For the year, the analyst is boosting adjusted EBITDA expectations by $93 million, but slimming them down from 2018 to 2021 by $29 to $36 million. For the year, adjusted EPS sees a boost by $0.17, but Nachman reigns in his forecasts from 2018 through 2021 by $0.05 to $0.12. Even with reduced projections down the line, the analyst sees fit to raise his price target under the assumption of lesser CapEx coupled with “working capital improvements,” as the VRX team is prioritizing this as a strategy to better create cash flow. Keep in mind, the giant still has to pay down a debt load to the harsh tune of $27 billion.

After a solid “step forward,” this last quarter, Nachman surmises: “VRX appears to have made some headway generating respectable growth in the B&L/Intl. and Branded Rx businesses, delivering better-than-expected cost savings, executing on some asset divestitures, and pushing out debt to 2020 and beyond. However, we are still concerned about durability of growth in key franchises and continued headwinds with US Dermatology and US Diversified.”

Wall Street is pretty evenly split between the bulls and bears, leaving consensus aligned with Nachman’s cautious take, as TipRanks analytics demonstrate VRX as a Hold. Based on 14 analysts polled by TipRanks in the last 3 months, 4 rate a Buy on Valeant stock, 7 maintain a Hold, while 3 issue a Sell on the stock. The 12-month average price target stands at $19.27, marking a nearly 32% upside from where the stock is currently trading.

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