Valeant Pharmaceuticals Intl Inc: Can Papa’s Lead Save VRX Stock?

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It has been a rough year for Valeant Pharmaceuticals Intl Inc (VRX), with the stock down almost 90% in the last year alone, and many around Wall Street still calling for the company’s bankruptcy.

Valeant Pharmaceuticals Intl Inc: Can Papa's Lead Save VRX Stock?The fact is that with VRX stock down so much, it can’t create cash by diluting the stock, and quite frankly, analysts and investors would crucify Valeant management for doing so.

Also, with $30 billion in debt, and creditors on lock-down, VRX cannot use debt as a means for creating a business plan that investors can get excited about.

The bottom line is that VRX stock has become a reflection of a company that has no value in its stock or balance sheet, and must now spend the next decade creating value by paying off debt, improving its credit and trying to operate smarter now that it can’t increase drug prices on acquired assets and companies.

However, despite a future that looks boring and highly complicated, VRX stock might just be one of the most exciting in the foreseeable future.

Papa’s the Answer to VRX Problems

Michael Pearson is out as CEO of Valeant, who led the company during its debt-raising, law-breaking, drug-pumping era that has since crushed shareholder value. Joseph Papa is the new sheriff in town, and is much better at cleaning up messes than Wall Street analysts and investors give him credit for.

Investors have been very critical of the board’s decision to hire Papa, realizing that his former company’s, Perrigo Company plc Ordinary Shares (PRGO), stock has declined by 50% over the last year. VRX is about twice the size of Perrigo, so Papa has a much bigger job ahead, and it has become a huge concern that Perrigo was ran very much like Valeant under Papa’s lead. Perrigo used acquisitions to fuel growth, a strategy that has not had a happy ending for VRX stock.

However, therein lies the reason why Papa is so great for Valeant stock and the company itself. Unlike Pearson, who would seemingly acquire anything with the goal of increasing drug prices, Perrigo has made acquisitions within reason, and has sought acquisitions to give PRGO an actual edge in business.

If we go back to when Papa’s tenure at PRGO began in 2006, there have been about a dozen acquisitions centered on vertical and horizontal expansion. It acquired companies like Galpharm, Orion and other over-the-counter drug companies to increase the number of OTC drugs it could sell.

Then it acquired companies like Laboratorios Diba S.A. and PBM Holdings to expand into new or broader regions like Mexico or New Zealand with those previously acquired products.

While Papa did enter several new businesses during his tenure, like animal wellness and baby foods, he did so in conjunction with previous acquisitions to expand those acquired products and businesses into new territories, and to create cost synergies.

Therefore, Papa has been very methodical with his approach, and while PRGO is down right now, don’t forget that it was previously a near-$200 stock before the IBB crashed lower and Valeant’s actions put pressure on similar companies. Yes, it is easy to criticize Papa for carrying a large debt load at Perrigo, but its debt-to-asset ratio is half that of Valeant, thereby reflecting a far more efficient approach.

Nevertheless, it’s clear that Papa is the man for Valeant, and at $28 a share, VRX investors should be excited about the future. Granted, there could be more fallout from the Pearson era, but I expect Wall Street to separate the new regime quickly from the old one.

So while $30 billion in debt is a lot to manage, especially with little stock value and no wiggle room with creditors, I feel good about the $1.4 billion on Valeant’s balance sheet, the $2 billion in free cash flow it creates annually and the upside of a large company that trades at just 5x trailing 12-month FCF.

Collectively, when you consider Papa’s past, and the Valeant mess, I think it is a cleanup job that has the right man in charge.

As of this writing, Brian Nichols was long Valeant stock.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/valeant-pharmaceuticals-vrx-stock-papas-lead/.

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