I’d only be playing the role of the lovably obnoxious character Captain Obvious if I said that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is in trouble. Well, call me obnoxious, but VRX stock is in trouble.
Like a fourth-and-forever situation in a tightly contested football game, management must consider extreme and outlandish options.
Some teams are known for their insanely aggressive tactics. Before the New England Patriots became five-time Super Bowl winners, head coach Bill Belichick once ordered an intentional safety. This move gifted their opponents two points, but it also provided better field position for the Patriots. With their backs against the wall, Belichick ultimately engineered an audacious come-from-behind victory. Can VRX stock pull a similar feat?
Here’s another Captain Obvious statement — Valeant Pharmaceuticals is going to have to do something. In 2016, VRX shares lost an eye-gouging 85% in the markets. For perspective, let’s consider that the highs early in that year were above $100. By the end of the year, VRX stock wouldn’t even buy you a dinner for two at Chipotle.
Still, we’re Americans. We (mostly) love a good comeback story: the Cleveland Cavaliers, the Chicago Cubs, the Pats, and of course, Mel Gibson. It’s a list that VRX stock desperately needs to get on. Fortunately, there is a legitimate argument for it.
The Bull Case for VRX Stock
The optimism for Valeant Pharmaceuticals is best illustrated by InvestorPlace’s Dana Blankenhorn: VRX needs to get a hold of cash fast. The simplest solution is to sell off some assets, and that’s exactly what’s happening. Blankenhorn writes that its “skin care line is going to L’Oreal SA (ADR) (OTCMKTS:LRLCY), and its equity interest in Dendreon — which produced prostate cancer treatment Provenge — is going to Sanpower Group.”
The two deals will contribute $2.1 billion for Valeant Pharmaceuticals. This isn’t going to be the end-all for VRX stock, which has many more problems ahead. But consider that its market capitalization is now down to $5.1 billion, any little bit helps significantly. It also sends a strong message of intent to long-term VRX shareholders that management is serious about returning value.
For what it’s worth, the markets have responded positively to these efforts. Still, if VRX stock is going to avoid an “over-the-counter remedy,” it will need much more. Popular eye-care company Bausch + Lomb would be a good start. It has robust financial performance, and could be worth a sweet penny in a sale.
Considering where we are, a reengagement of the Salix division could be in order. The deal between Valeant Pharmaceuticals and Takeda Pharmaceutical Co Ltd (ADR) (OTCMKTS:TKPYY) fell through last November. Salix is considered to be the crown jewel for VRX stock. At the same time, you gotta do what you gotta do.
Not So Fast!
Of course, nothing is ever that easy in the markets. Otherwise, every troubled company would just sell their assets on eBay. The primary counterargument against such tactics is that it guts the core essence of the business. Without anything to promote, market and distribute, you essentially end up with a hobby. And we all know that the IRS frowns on hobbies masquerading as businesses.
InvestorPlace contributor Will Ashworth brings up two valid points. First, the jettisoning of assets is only a short-term solution to a long-term problem. Yes, VRX stock would get a nice pop like we have witnessed. However, when faced with a $30 billion debt load, cash flow is critical. Selling your prime moneymakers will net a big payday, but what’s more important are “pay-months” or “pay-quarters.”
Then there’s the tricky issue of financial stability. Ashworth uses the Altman Z-Score to clearly demonstrate that VRX stock is in bigger trouble than many people realize. We’re talking worse than Sears Holdings Corp (NASDAQ:SHLD). If you’ve ever perused any business journal in the past few months, you’ll know that SHLD is a bankruptcy candidate.
Ashworth is really citing a simple math equation. It looks something like this: “Awful = SHLD > VRX.” Therefore, VRX must really be knee-deep in the smelly stuff.
Valeant Pharmaceuticals Is Fundamentally Flawed
Having looked at both the bulls and the bears, we’ll just bring up one last obvious statement: anything can happen. For starters, the Altman Z-Score is a very accurate predictor, but it’s far from perfect. Also, since it considers market cap in its formulation, a powerful surge in VRX stock could change everything. Maybe Valeant Pharmaceuticals will accidentally find the cure for cancer.
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For VRX stock, the Z-Score is absurdly worse than SHLD stock. That right there is a major red flag. But the negative growth rate just kills the VRX as a long play idea for me. Over the past nine quarterly reports, the Z-Score rate is -15.3%. The equivalent for SHLD isn’t great, but a lot better at -6%.
I think it’s safe to say that VRX stock is the Twitter Inc (NYSE:TWTR) of the pharmaceutical industry. Surely, it is enticing to buy a once triple-digit company for pennies on the dollar. The question for tomorrow is — is that a U.S. dollar or a Zimbabwean dollar? Just make sure to be aware of the latter if you’re gambling for the former.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
