Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

4 Reasons to Stay Away from Valeant Pharmaceuticals Intl Inc

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is a risky play for even the most confident investor. Share prices gave a glimmer of hope recently when they rose to almost $18 at the end of July, but as usual the good news was short lived. Now VRX is back trading at just $14 – compare this to the high back in 2015 of $257 and you can see just how far the stock has crashed in the last two years. While it does seem like Valeant is making good on its promise to cut its massive debt burden by $5 billion, there is still plenty to be concerned about.

So for those investors still willing to bet on a recovery under new CEO Joe Papas, first read this:

  1. Falling Revenue – Revenue declined by 7.8% to $2.23 billion for the second quarter ending on June 30 from the same period last year. In other words, revenue is down by $187 million year-over-year. The drop was mainly caused by a reduction in volume and pricing of its US Diversified Products segment, in particular due to expiring patents and its struggling dermatology business. Even strong growth of IBS drug Xifaxan- up 16% year-over-year- was not enough to save the day. As Papas continues to divest of revenue-bearing assets (see Dendreon, iNova, and Obagi for example) it will become increasingly difficult for VRX to maintain its current revenue levels as well as free cash flow.
  2. Interest Repayments – Although Papas is making impressive strides in reducing debt, the interest payments on the remaining sum will still be crippling for Valeant. If we take a long-term debt figure of $25 billion, Valeant will need to make quarterly repayments to cover the interest of around $370 million. The worrying part is that this figure is still significantly above the company’s current level of operating income.
  3. New Products Take Time to Ramp Up –  Papas hopes to fill the gap from divestures by launching new products. First and foremost the company is looking at Siliq which helps treat severe psoriasis and was launched in July. Siliq, say Valeant, is “the lowest-priced injectable biologic for moderate-to-severe plaque psoriasis inthe United States.” However Valeant is only forecasting that new products combined i.e. including Siliq will bring sales of $100 million this year. While this is a nice addition, it will not be enough to make up for divestures for a long time to come.
  4. Loss of Exclusivity (LOE) for Key Products –  VRX took a serious LOE hit in Q2. The company’s Q2 earnings report says: “As expected, LOE for a basket of products drove more than two thirds of the decline in segment revenue and Adjusted EBITA (non-GAAP).” This reduced revenue by about $110 million from the same period last year. VRX is expecting a revenue boost for full year 2017 of $120 million because some products have not lost exclusivity as soon as expected. But the LOE cannot be delayed forever, and now the brunt of the fallout is likely to be felt in 2018. VRX has not given any guidance for next year so it is difficult to predict exactly how bad the story will be- but we could be looking at a $785 million top line cut. However, Valeant CFO Paul Herendeen did have this warning for investors:  “We would prefer as you’ve seen that we continue to see increased revenue expectations for that LOE basket. But those – make no mistake, those are going away in 2018. So that you need to keep that in the back of your head.”

But note the wide divergence of price targets from $8 on the low to $35 on the high. In fact, the lowest 12-month price target of just $8 (-42% downside) comes from top Mizuho Securities analyst Irina Rifkind Koffler. She has a very strong track record on VRX specifically of 69% success rate and 15.7% average return over her 26 Valeant ratings.

Koffler who is a longstanding bear on VRX stock- reiterated her Sell rating on Valeant on August 7. She says that fundamentals continue to be rocky and added that: “the stock has rallied on debt repayment news but not much has changed in the underlying business, so we think a correction is likely.


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