Ken Griffin is a man known to be raring to take a risk when it is worthwhile, a daring and strategic mindset that has enabled Illinois’ wealthiest man to garner recognition from the likes of Forbes. How does a guru with a net worth of $8.6 billion to his name assess two of the most volatile players in the biotech-verse: Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)?
To offer some context, the hedge fund guru kicked off his money-maker of a Chicago-based hedge fund Citadel back in 1990, a firm that has since landed among the globe’s leading alternative investment management companies thanks to investment capital that circles a monster $27 + billion. Keep in mind, this is a firm that began with $4.2 million in assets almost 30 years ago now.
Just this week, Citadel’s savvy founder and CEO commented to CNBC that if the bull market rally were appraised as a baseball game, there would still be two innings left running, even with taut valuations. Calling this still a “constructive” atmosphere for shares to thrive on back of unelevated inflation, small interest rates, and companies that are experiencing a fair amount of sales gains, valuations have a robust foundation, which could be why the richest man of Illinois is taking a bullish gamble on Valeant and Teva.
Let’s dive in to the successful hedge fund manager’s latest quarterly plays:
Stepping Up in Valeant
Griffin is seizing the opportunity with Valeant, dialing up his hedge fund firm’s stake in the company to the massive tune of a 260% boost up. Now, with 1,178,006 shares purchased later, Citedel now holds a total position of 1,631,724 shares worth $23,383,000 in the comeback kid of the Street.
Deutsche Bank analyst Gregg Gilbert is less confident than Griffin, noting that the recovering biotech giant is “still warming up.”
Therefore, even while acknowledging core franchises are “growing” and the management team is tackling the debt, the analyst maintains a Hold rating on VRX stock but trims the price target $1 to $18, which implies an 8% upside from where the stock is currently trading. (To watch Gilbert’s track record, click here)
“VRX has undergone significant change under the new management team, which we applaud for managing near-term debt maturities, returning the core franchises (Salix, Bausch+Lomb / International) to growth, and resolving some legacy legal issues. While we stick with a Hold based on uncertainties around the growth potential and duration of Xifaxan and other franchises, mediumterm debt maturities, potential impact of US tax reform, and the potential cost of past sins, we note an improving risk/reward for the stock as VRX continues to deliver on its financial expectations and proactively manage its debt load. While we cannot predict the timing or magnitude of liabilities stemming from ongoing investigations and lawsuits, we now include $500mn as a preliminary assumption (vs. none previously),” notes Gilbert, who for this reason dials his expectations down a notch.
On a positive note, the company’s “core franchises [are] growing well,” the analyst recognizes, highlighting a rewarding return to gains for core Bausch + Lomb and International, marking around 57% of Valeant’s revenue, as well as Salix, which comprises about 20% of VRX’s revenue. The VRX team thanks improved resource allocation and more investments for this growth recovery, and Gilbert contends, “The company’s ability to grow these durable businesses will be critical for the stock, in our view.”
With Valeant’s biggest asset, irritable bowel syndrome (IBS) treatment Xifaxan, bringing roughly 13% of the giant’s revenue to the table, this indicates a meaningful driver for the company’s growth, the analyst writes, noting that the VRX team has bolstered its sales force to maximize its targeting of the primary care market. With prescription trends kicking up, this is a strategy that seems to be paying off thus far.
The key priority looming for Valeant continues to be lessening its colossal debt, and new management has already lowered the debt by around $6 billion with free cash flow coupled with divestiture proceeds. As Dermatology bottoms out, the company has turned to pricing and new launches to offset the dip.
Street-wide caution circles the volatile biotech player, as TipRanks analytics model VRX as a Hold, a toss-up between the bears and the bulls. This boils down to 3 bullish analysts, 7 neutral, and 3 bearish in the last 3 months. Is the biotech giant an undervalued or overvalued stock? Right now, analyst expectations align with levels where the shares last closed, with the 12-month average price target standing at $16.60.
Pushing the Pedale on Teva
Teva has tempted Griffin to take a chance on the rebounding Israeli pharma giant, leading the multi-billionaire to bump up his position 198%, adding an extra 335,878 shares to Citadel’s stake now towering at 505,165 shares worth $8,891,000.
For a company whose shares have lost over half in value this year, Credit Suisse analyst Vamil Divan is not impressed with this week’s corporate shake up news of restructuring and a leadership refresh. This is not Teva’s first rodeo, says the bear.
Divan explains, “We have been here before with TEVA, with new management coming in and trying to reshape the company, but running into challenges with the Board in executing their plan. Circumstances are different this time, of course, and the situation is more grim, with TEVA’s debt level far exceeding its market cap and its credit status walking a tightrope between investment grade and junk. The Board has said they will work with Schultz on whatever plan he comes up with, but until we see that commitment backed up by action, we maintain our current outlook.”
Until more details arise the middle of next month on these restructuring intentions, the bearish camp might argue it is jumping the gun for investors to get excited now at just the thought of a revamp.
As such, the analyst maintains an Underperform rating on TEVA stock with a price target of $8, which represents a nearly 48% downside from where the stock is currently trading. (To watch Divan’s track record, click here)
Wall Street is split between Griffin’s bullish bite and Divan’s bearish take. TipRanks analytics view TEVA as a Hold, as in the last 3 months, the biotech player’s shares have seen 3 analysts rate a Buy, 12 maintain a Hold, and 4 issue a Sell. Based on these analysts’ expectations, this chocks up to an average price target on Teva stock of $14.64, which implies a nearly 3% downside from where the shares last closed.