When the President of the United States lightens his focus on high drug prices and instead looks at the whole Medicare system and its pricing structure for patient care as a whole … well, generic drug stocks should be soaring. But that’s not the case. While the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) rose on the news, beaten-down shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) plumbed yearly lows.
When Valeant reports quarterly earnings on Feb. 28, will VRX stock finally rebound?
A month is a long time for Valeant shareholders. The market will judge, in advance, sales growth from the Salix unit. Xifaxan sales rose from $220 million to $273 million year-over-year in the third quarter. That is above an annualized $1 billion in sales, but VRX will need sales growing at an even faster rate. Salix bolstered its sales team. The company said it would loosen its budget to allow for higher advertising spending.
Asset Sales Ignored
Buying of VRX stock picked up when rumors circulated it would sell Salix or B+L. When the CEO sold non-core assets, including its skin division, at a price of 7 times sales, the stock rallied, but then slumped.
Investors want to see a multibillion-dollar sale now. Unfortunately, a sale of that size not only takes time but needs a healthy premium attached. By cutting operating expenses, raising research and development spend, and advertising more, Salix and B+L will reverse their sales slump.
In November, 2016, Valeant said:
“Our divestitures program is expected to allow us to reduce our quantum of debt further. We continue to expect that between our free cash flow and divestiture proceeds, we’ll be able to reduce debt by more than $5 billion by early 2018.”
Selling assets takes time. Valeant has plenty of time and sufficient cash flow to search for the right buyer by 2018.
Valuation
Valeant trades at a steep discount to that of other generic drug makers. One metric illustrating this is the price-to-sales, which is 0.47 for VRX sales:
- Teva Pharmaceuticals (NYSE:TEVA) has a P/S of 1.7.
- Endo International (NASDAQ:ENDP), whose business is moving from generic drugs to promising drug discovery, has a P/S of 0.72.
- Mylan N.V. (NASDAQ:MYL), whose EpiPen pricing caught the attention of government trades at a P/S of 2.
Trading Strategy
Click to Enlarge Valeant is a speculative stock. Keep the allocation to a minimum. To the right is an example of a real-world live trading strategy that holds VRX stock.
Takeaway on VRX Stock
Short-selling on Valeant stock is lightening up at 9.6% of share float. Another drop is possible but is expected for a behemoth of a drug company turning its entire business around.
Non-core asset sales, sales stabilization, progress in drug discovery, and favorable drug pricing will lift the share price over time.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
