The news only gets worse for Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The most recent negative headline was the exit of Bill Ackman — the largest holder of Valeant stock — from his position. That news sent VRX stock down 10% to its lowest level since 2009. And it continued a long, ugly slide that cost Ackman’s fund some $4 billion and has pushed the stock from $263 in August 2015 to current prices below $11.
I remain highly skeptical that the trend in Valeant stock will change. At this point few, if any, investors understand the inner workings of VRX stock better than Ackman.
And yet he chose to exit at current prices.
The fact that he chose to cut his losses isn’t a sign of weakness. After all, Ackman executed tax-loss selling of a portion of his stake in December. And he’s stubbornly stuck with his short position in Herbalife Ltd. (NYSE:HLF) despite losses in that trade as well.
There have been opportunities to sell as recently as August, when Valeant stock spiked from $21 to $31 in a matter of weeks. The fact that Ackman is selling now implies a material change in the company’s positioning and prospects over the last six months. The sale at an apparent price of $11 is an admission from Ackman that VRX stock isn’t coming back any time soon, if ever. And for many reasons, I believe the fund manager is (finally) right.
The VRX Stock Chart
I’m admittedly no technical expert, but I’m unfortunately familiar with “falling knives.” And the fact is that from a technical standpoint, there’s essentially no evidence of a bottom in Valeant stock. There have been a few brief bouts of optimism: a ~50% gain in August, a quick spike in early November, a 25% run in February. None have lasted, and none have held.
It’s tempting to view VRX stock as cheap in the context of past declines. After all, Valeant stock already has lost 96% of its value; how much more can it lose?
The answer for new investors is: it can lose another 100%. The price in July 2015 has little bearing on the price in April 2017. The problem with the argument that VRX stock is too cheap because it’s down 96% is that it ignores the fact that the stock was down 90% from its peak just seven months ago. And investors who bought Valeant stock on that argument have lost about 60% of their capital.
No Bankruptcy Doesn’t Mean Valeant Stock Goes Up
Of late, the focus on Valeant has turned from its business to its balance sheet. The company’s $30 billion in debt has caused VRX to sell off assets. In January, Valeant sold three skin-care brands to L’Oreal SA (ADR) (OTCMKTS:LRLCY), and its Dendreon business to a Chinese conglomerate. In late March, a debt refinancing extended maturities out to 2020, ostensibly giving VRX more time for a turnaround.
The problem with the focus on a Valeant bankruptcy is that it implies a binary outcome. Either the company goes bankrupt — in which case VRX stock goes to zero — or it doesn’t, in which case Valeant stock goes up.
That’s not the case. VRX’s market capitalization still is $3.6 billion. EBITDA is guided to $4 billion-plus in 2017. It would appear that if the company can manage that debt load down, and keep profits flat, the stock would go up.
But that’s a major ‘if’. There’s still a significant question as to whether VRX has to sell an asset like Bausch & Lomb, which likely contributes as much as 20%, if not more, of that profit. Patents on key drugs have expired and continue to expire. Valeant can find a way to stay alive, but that doesn’t mean VRX stock will be worth $10 or $15 billion should that outcome occur.
Valeant Isn’t A Great Business
I’ve made this point before: I’m skeptical Valeant is a great business even if it were ‘fixed’. The pharmaceutical business isn’t an attractive one at the moment. Politicians are criticizing drug companies left and right. Generic companies like Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) are trading at single-digit multiples to earnings, and look like better buys than VRX stock. Other than branded majors like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK), many drug stocks have struggled lately, even without Valeant’s self-inflicted wounds.
It seems likely that Bill Ackman finally came to understand this issue over the last few months. The question with VRX isn’t what its price is relative to 2015 levels. It isn’t just whether the company can kick its debt further down the road.
The question — as it is with any stock — is what business an investor is choosing to own. And from that perspective, Valeant Pharmaceuticals just doesn’t seem that impressive. When you tack on an ugly chart and the $30 billion in debt, the bull case for VRX stock becomes nearly impossible to make.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
