Valeant Pharmaceuticals International, Inc. (NYSE: VRX), (TSX: VRX) is a multinational specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of dermatology, gastrointestinal disorders, eye health, neurology and branded generics.
The company recently announced that, following the sale of three skincare brands to L’Oréal and the closing of the divestiture of a manufacturing facility in Brazil, VRX has reduced its senior secured terms loans by approximately an additional $220 million as of Monday May 1, 2017. In aggregate, the company has now reduced approximately $3.6 billion of debt from the end of first quarter 2016.
The company continues its efforts for a meaningful deleveraging of its balance sheet and is expecting to reduce around ~ $5 billion in debt from divestiture proceeds and free cash flow within 18 months of August 2016. The medium-term goal of the company is to reduce debt from $30 billion to $15 billion- $20 billion.
In addition to the expected operational synergies and financial flexibility, re-payment of debt undertaken by the company along with plans to undertake further liability management over the near term will also significantly reduce the re- financing risk for Valeant.
Also, the company is considering changing its name, a proposal led by the controversies surrounding the company. Valeant’s stock has lost 96 percent of its value in Toronto since hitting a record high in August 2015, on concerns relating to exorbitant prices of some drugs, investigations of some of its practices and surging debt. Management has declined to specify an alternative name or give a specific time frame for when such a decision would be taken.
Valeant’s new management team is aggressively focusing on image makeover by displaying its competence and a convincing performance. This recent pay down of $220 million in debt is yet another convincing move to reduce Valeant’s aggressive leverage. In fact, management’s conscious efforts are also evident from the fact that, CEO Joe Papa himself made a very substantial stock purchase with his own money thereby making a statement to the markets that he believes in the company’s future ability to be on a rapid growth trajectory.
The next few quarters are expected to include more of the similar activities i.e. reduction in debt, ramping up sales and cutting expenditures. Furthermore, Valeant expects to accelerate its growth mode by growing its existing businesses organically.
Valeant is scheduled to report its first quarter earnings on May 9, 2017. Apart from company specific factors, first quarter results seem to be influenced by industry-wide weakness as well. Total revenues are expected to be $2.21 Billion in the current quarter, according to consensus of 11 analysts. The high and low revenue estimates for the current quarter are $2.28 Billion and $2.09 Billion, respectively. The company reported revenue of $3.14 Billion in the same period last year.
In the recent past, the shares have experienced substantial selling pressure after results announcements. In fact, Ackman’s Pershing Square Management, previously Valeant’s biggest shareholder, sold off its position earlier this year and took about $4-billion in losses. With that in mind, upcoming earnings will remain a critical stock sensitive event for the company.
Following are selected analyst ratings and price targets:
Royal Bank of Canada – price target of $18.00 – View: Out perform – March 23rd
J.P. Morgan – Price target of $10.00 – View: Hold – April 20th
Mizuho’s – Price target of $8.00 – View: Sell – April 12th
Out of 15 analysts who cover the stock, 9 suggest a hold rating, 3 suggest a Sell and 3 recommend buy. The 12-month average price target assigned to the stock is $14.40, which represents a potential upside of 56% from where the stock is currently trading.
About the company: Valeant Pharmaceuticals International, Inc is a pharmaceutical and medical device company. The Company is engaged in developing and marketing a range of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products, and medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices).
Product Portfolio: The Company’s portfolio of products falls into three reportable segments: (i) Bausch + Lomb/International, (ii) Branded Rx and (iii) U.S. Diversified Products.
The Bausch + Lomb/International segment consists of sales of (i) pharmaceutical products, OTC products and medical device products in the area of eye health, primarily comprised of Bausch + Lomb products, with a focus on four product offerings (Vision Care, Surgical, Consumer and Ophthalmology Rx) sold in the U.S. and (ii) branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products, and Bausch + Lomb products sold in Europe, Asia, Australia and New Zealand, Latin America, Africa and the Middle East
The Branded Rx segment consists of sales of pharmaceutical products related to (i) the Salix product portfolio in the U.S., (ii) the Dermatological product portfolio in the U.S., (iii) branded pharmaceutical products, branded generic pharmaceutical products, OTC products, medical device products, and Bausch + Lomb products sold in Canada and (iv) the oncology, dentistry and women’s health product portfolios in the U.S
The U.S. Diversified Products segment consists of sales (i) in the U.S. of pharmaceutical products, OTC products and medical device products in the areas of neurology and certain other therapeutic classes, including aesthetics (which includes the Solta and Obagi businesses) and (ii) generic products in the U.S
Pipeline: The Company’s pipeline combines promising early and late-stage drug candidates that have unique formulations and mechanisms of action that address the need for new treatment regimens. Valeant also plans to strategically expand its pipeline by adding new compounds and product extensions through company and product acquisitions.
Valeant Pipeline Highlights:
Key Stock Influences
Some key influences that might govern future stock price performance include:
- The company has been aggressively focusing on divestment – seeking to sell a variety of assets, some of which may be material and/or transformative, which could adversely affect its business, prospects and opportunities for growth. Notwithstanding expected synergies, the ongoing divestment has a flipside as well. For instance, the skincare brands recently passed along to L’Oreal, were contributing around $168 million to topline. They won’t be contributing to revenue anymore. Neither will any of the other properties and intangible assets Valeant sold since early 2016. Therefore, the company’s ability to build a strong revenue pipeline will continue to remain a key challenge for the new management.
- A major portion the company’s product portfolio are getting off patent or losing significance. As per management, patent expiration could cost the company $785 million sales this year. Additionally, dermatology sales are on pace to slide between 8% and 10% this year as well. Therefore, management’s ability to increase its market share while improving profitability will be one of the key monitorable and stock-driving factors for the company.
- Given its high fixed cost business model, Valeant is burning cash above $300 million per quarter. They only had $542 million in the bank as of the end of the fourth quarter of last year. Therefore, the company’s ability to maintain liquidity and financial flexibility would be a key credit sensitivity factor.
- The company’s Credit Agreement and the indentures governing its senior notes impose restrictive and financial covenants. Failure to comply with these covenants could trigger events, which could result in the acceleration of the related debt, a cross-default to other debt, foreclosure upon any collateral securing the debt and termination of any commitments to lend, each of which would have a material adverse effect on business, financial condition, cash flows and results of operations and would cause the market value of common shares to decline.
- Valeant also suffers from customer concentration. The company’s largest customers including McKesson Corporation, Cardinal Health Inc and AmerisourceBergen Corp collectively made up half of last year’s sales. Any adversity with these major customers could adversely affect the market share of the company and thus its equity performance.
Earnings Review: Revenues for fourth quarter of 2016 were $2,403 million as compared to $2,758 million during fourth quarter of 2015, translating into a decline of 13%.
The reduction was mainly led by a reduction in product sales from the existing business (excluding effects from acquisitions, foreign currency and divestitures and discontinuations) of $310 million and the negative impact of foreign currency exchange of $43 million, most notably from the Egyptian pound, which was significantly devalued in November 2016. Revenues in the quarter were further impacted by a drop in realized pricing by 3%, along with divestitures and discontinuations of $16 million. These declines were partially offset by incremental product sales of $13 million from acquisitions.
Operating Metrics
Operating income for the fourth quarter of 2016 was $151 million as compared to $168 million for the fourth quarter of 2015. Fourth quarter operating income reflected a decrease in contribution margin as a result of the decline in product sales from the existing business, the unfavorable impact of foreign currency, net incremental goodwill impairment charges, and the impact of divestitures and discontinuations.
Net loss for the fourth quarter of 2016 was $(515) million as compared to a net loss of $(385) million in the fourth quarter of 2015, an increase of $130 million. In addition to the increase in operating loss of $17 million, the increase in Net loss was primarily driven by increases in interest expense of $34 million, foreign exchange loss and other of $43 million, and provisions for income taxes of $33 million.
Cash Flow & Balance Sheet
Net cash provided by operating activities for the fourth quarter of 2016 was $513 million as compared to $598 million for the fourth quarter of 2015, reflecting a decline of 14%. The decrease was primarily driven by the decrease in contribution margin as a result of the decline in product sales from existing business partially offset by lower cash operating expenses.
Results were further impacted by an increase in interest paid of $449 million due to higher borrowings, primarily resulting from the issuances of debt in connection with the Salix Acquisition and an increase in interest rates applicable to term loans and borrowings under a revolving credit facility.
Therefore, to service debt in a timely manner, the company will be required to generate significantly more business. The company has incurred significant indebtedness, which restricts the way it conducts its amount of cash. Failure to meet debt obligations would have a material adverse effect.
Stock Performance
On Wednesday, May 3rd 2017, VRX shares declined by -2.72% to $10.03 on an average volume of 15.57 Million shares exchanging hands. Market capitalization is $3.65 billion. The current RSI is 51.37
In the past 52 weeks, shares of VRX have traded as low as $8.31 and as high as $38.50
At $10.04, shares of VRX are trading below their 50-day moving average (MA) at $11.07 and below their 200-day MA at $18.13
The present support and resistance levels for the stock are at $9.99 and $10.56 respectively.
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