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.

Don’t Count Valeant Pharmaceuticals Intl Inc (VRX) Out Just Yet

Controversial pharma Valeant Pharmaceuticals Intl Inc (NYSE:VRX) appears to be hanging on for dear life. Share prices dropped (again) on March 13 to 7-year lows and have yet to recover following the announcement that (ex) staunch VRX supporter hedge fund manager Bill Ackman sold out his fund’s entire VRX shareholding.

After selling shares at just $11, resulting in a heavy $3 billion loss to the fund, Ackman will now leave his position on the Valeant board. “[W]e see this as a vote of no confidence for the stock and that things are continuing to go from bad to worse for Valeant,” said top Wells Fargo analyst David Maris on the news.

And that isn’t all. Ackman’s exit follows the announcement that VRX is restructuring $3 billion in debt and removed/ modified certain maintenance covenants. Again, this move was badly received by the markets as a sign that the outlook on future earnings is unclear and that previous targets may not be met (for example see Irina Rifkind Koffler’s recent sell rating). Indeed, one commentator suggested that Valeant was one step away from a controlled liquidation.

Or is it? Peer a bit closer into the gloom and there are some nuggets of hope. Here are four reasons why it isn’t all bad news for Valeant:

  1. First of all, since Ackman cleared his VRX holding, insiders have been busy snapping up shares. In the last week, Valueact Holdings, Richard De Schutter and Paul Herendeen have upped their VRX positions by $32.4 million, $108,000 and $257,000 respectively. This suggests that there isn’t some catastrophic event on the immediate horizon that Ackman had inside knowledge of and was trying to escape.
  2. Secondly the restructuring doesn’t have to be interpreted so negatively. While the move certainly damaged sentiment towards Valeant, four-star analyst Annabel Samimy says that restructuring was an important step with meaningful benefits for the company. According to Samimy VRX “remains committed to its $5B debt repayment target by early 2018.” Samimy reiterated her buy rating on the stock on March 14. The restructuring staves off the short sellers- who are betting that VRX will collapse under its heavy debt burden- and gives management some room to maneuver. VRX is now freed of the burden of selling assets speedily in a fire sale for discount prices, and has time to consider other strategic transaction opportunities. Finally, it’s also possible that with time shares could stabilize and finally find a comfortable value to hold on to.
  3. Short sellers should also take into account that VRX is not merely a bubble with zero value. Indeed, Valeant’s prized Bausch & Lomb division saw revenue of $4.6 billion and an EBITDA of $1.3 billion for 2016 and has a predicted yearly growth in 2017-2020 of 4-6%. The company, which specializes in eye health products, also has a targeted plan to boost expansion in two key fast-growing markets: China and Japan. In fact, over 85% of B&L’s EBITDA does not originate in the US which could benefit the division if President Trump introduces stricter drug pricing requirements.
  4. Siliq and IDP-118- these are two interesting new products developed by Valeant to treat psoriasis. Siliq, which is administered by injection for patients that have stopped responding to other systemic therapies, is due to be launched in Q3 of 2017. The drug received approval from the FDA in the middle of February. IDP-118 is a lotion, also intended for severe psoriasis, which produced positive results in the second Phase 3 study. While these drugs do face competition, if they can take a share of the market (estimated to be worth about $7billion in 2018) then this will provide some much-needed positive cash flow for Valeant.

Perhaps unsurprisingly the analyst consensus rating on TipRanks for Valeant stock is hold, with 3 buy, 9 hold and 3 sell ratings. In a reflection of the divergence of views on the stock, the 12-month analyst price targets published on the stock in the last three months range from $9.00 (-18.4% downside) to $22.00 (99.5% upside).

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