Valeant Pharmaceuticals Intl Inc (NYSE:VRX) revealed the human side of its business at the company’s annual shareholder meeting held on May 2, 2017, in Laval, Canada. The meeting was highlighted by inspirational messages from legacy shareholders, many of whom have been with the company since it was worth over $200 per share.
Valeant also held important votes over new members of its leadership team, auditing, and compensation. Joe Papa, the company’s CEO, outlined Valeant’s strategic turnaround to date and outlined plans for the future. He marked May 2, 2017, as the official beginning of Valeant’s turnaround. Investors can look forward to earnings later this week to see how the narrative materializes.
Debt Paydown and EV/EBITDA Calculations
Debt is one of the most important issues for Valeant going forward, and the company is making progress toward reducing its leverage to manageable levels. Joe Papa made it clear that Valeant is not aiming to completely eliminate its debt and would be happy with long term debt of $15-20 billion – a much more attainable goal. At $20 billion in long-term debt, assuming EBITDA stabilizes $3.5 billion, (the low end of the 2017 guidance range) Valeant would have debt at 5.71x annual EBITDA.
If the market cap remains around $3.6 billion, enterprise value can be roughly estimated to become $23 billion assuming Valeant holds around $0.6 billion in cash on its balance sheet at this time. An enterprise value of $23 billion represents a significant reduction from the current figure. And at $3.5 billion in EBITDA, Valeant would have an EV/EBITDA of only 6.57.
According to Investopedia, the average EBITDA multiple in the U.S stock market is 14.7x. Valeant would definitely become a relatively cheap stock if its EBITDA multiple was only 6.57x. Most likely, the stock price would rally significantly before EV/EBITDA could fall so low. Valeant’s management has a clear pathway toward delivering returns just through the paydown of debt and stabilization of EBITDA. But stabilizing EBITDA may be difficult.
EBITDA Stabilization and Growth Drivers
Valeant aims to pay down its debt through free cash flow and divestitures. Recently, $220 million in senior secured debt was paid down with proceeds from a divestiture in Brazil along with funds left over from the sale of several skin care brands to L’Oreal in January. But while the debt seems to be under control, the prospects for top-line growth and EBITDA stabilization are not as bright.
According to Joe Papa, Valeant plans to launch 50 products worldwide in 2017, and most of these products are in the company’s dermatology division and Bausch & Lomb. But surprisingly, Valeant only projects an additional $100 in annual revenue to come from these new products. $100 million is a drop in the bucket compared to the $9.67 billion in annual revenue posted for the full year of 2016. By the time this additional revenue filters down to the bottom line, the EBITDA impact will be minimal, especially considering Valeant’s renewed focus on R&D.
Valeant’s annual shareholder meeting provides some key updates on the company’s turnaround story and gives a glimpse into the perspectives of legacy shareholders. Joe Papa and the rest of Valeant’s new management team made a good showing and the market will probably be impressed by their presentation.
On the important issue of debt, Valeant is making good progress toward reducing its leverage. The company’s goal of $15-20 billion in long-term debt is attainable and likely to deliver value to shareholders by allowing equity to make up a larger part of the company’s capital structure. However, Valeant’s top line is still showing significant weakness, and new growth drivers look unlikely to make up for the sales declines in some of the company’s older drugs.
Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as an investment advice.