Valeant Pharmaceuticals International, Inc. (VRX) Stock Is Still Too Ugly

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Shares of drugmaker Valeant Pharmaceuticals International, Inc. (NYSE:VRX) have been on fire of late, soaring almost 40% from a low of $9.71 on May 8 to Thursday’s high of $13.46. Those who are suddenly rushing to own VRX stock thinking its asset sales will make a difference should think again.

Valeant Pharmaceuticals International, Inc. (VRX) Stock Is Still Too Ugly

Once Canada’s most valuable company, with Valeant Pharmaceuticals trading north of $300 in the summer of 2015, VRX has become a haven for speculators, not investors, who are drawn to the appeal of a cheap price.

VRX stock closed Thursday at $13.26. The embattled drug company, which has become synonymous with “price gouging,” has been more successful at boosting its drug prices than growing its value.

Valeant Pharmaceuticals: The Garage Sale Continues

With some $28.5 billion in debt on the balance sheet, the laundry list of things the management needs to do to repair Valeant Pharmaceuticals is long. On the bright side, Vrx has begun to address its debt situation by divesting various non-core assets. On Wednesday, the company announced another divestiture, selling its iNova Pharmaceuticals business to funds owned by Pacific Equity Partners and The Carlyle Group for $930 million in cash. This marked the company’s third divestiture this year.

iNova, which has a strong presence in Australia, South Africa and Asia, markets a portfolio of prescription and over-the-counter products that focus on pain management, cardiology, coughs and weight management. This deal follows Valeant Pharmaceuticals’s sale of Dendreon to Sanpower earlier this year for $820 million in cash. Valeant also announced the sale of three skin-related brands to L’Oreal SA (ADR) (OTCMKTS:LRLCY, OTCMKTS:LRLCF) , which fetched just $168 million. All told, these deals have helped VRX stock shave off $1.5 billion in debt since the start of the year.

But here’s the thing: As Valeant is understandably racing to reduce its debt position, the company is underinvesting in areas such as research and development. Not to mention the fact that selling off assets will impede revenue, which suffered an 11% decline in the first quarter. And absent revenue growth, combined with loss of exclusivity of some key drugs, VRX stock has limited routes to grow profits, especially given the negative aura surrounding drug price increases.

The optimal route would be for the company to figure out a way to renegotiate its debt covenants for a smaller amount, which would offer Valeant Pharmaceuticals much-needed cash flow relief. In other words, how to boost operating income without crippling the business is what VRX CEO Joe Papa must figure out. While asset sales to grow cash will help pay off debt, Valeant is shrinking its own business, compounding the problem by underinvesting into R&D. So, while VRX stock is being celebrated today for these moves, the long-term effects will soon be felt. And it won’t be pretty.

Bottom Line for VRX Stock

In the first quarter of 2017, Valeant Pharmaceuticals posted its first profit in six quarters and the company raised the annual guidance for 2017. But it’s premature to suggest that jumping over a low bar in one quarter is enough to light up the “all clear” signal. Until Valeant can demonstrate it can consistently execute on its revenue, profit and debt-deducting metrics without mortgaging its future by sacrificing R&D, VRX stock will continue to attract short sellers, who have been the only ones making money on the stock.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/valeant-pharmaceuticals-international-inc-vrx-stock-too-ugly/.

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