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.  

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