3 Reasons Valeant Pharmaceuticals Intl Inc (VRX) Stock Is Dangerous to Your Portfolio’s Health

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VRX stock - 3 Reasons Valeant Pharmaceuticals Intl Inc (VRX) Stock Is Dangerous to Your Portfolio’s Health

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Back in mid-march, billionaire hedge fund investor Bill Ackman unloaded his stake in the beleaguered Valeant Pharmaceuticals Intl Inc (NYSE:VRX). It represented one the biggest losses in investment history — coming to roughly $4.1 billion. Keep in mind that this amount was bolstered by sophisticated options strategies that backfired. In fact, this is why Ackman lost his initial investment.

VRX Stock: 3 Reasons Valeant Pharmaceuticals Intl Inc (VRX) Is Dangerous to Your Portfolio’s Health

As a result, in a letter to his investors, he gave a mea culpa for his investment in VRX stock, saying:

“In retrospect, we misjudged the prior management team, and this contributed to our loss. We deeply regret this mistake, which has cost all of us a tremendous amount, and which has damaged the record of success of our firm.”

But as a cruel irony, the shares have VRX stock have since gone on to rally!

Yet I still think Ackman made the right decision to sell. All in all, Valeant stock is fraught with risks. So let’s take a look:

VRX Stock Problem No. 1: Overreaction

Ahead of its latest earnings report, the bar was set very low for Valeant Pharmaceuticals. Thus, when the company had some good news, it was enough to ignite a powerful rally.

Besides, the better-than-expected results were actually fairly minor. For example, the company was able to pay off some of its debt earlier — because of the divestiture of assets to L’Oreal SA (ADR) (OTCMKTS:LRLCY) — and the guidance on EBITDA was increased by $50 million on a full-year basis. Oh, and VRX did post earnings for the quarter. Yet this was primarily because of a hefty one-time tax benefit.

Something else: There was a notable short position in VRX stock — at about 14% of the float. In other words, there’s a good bet that part of the upward move was due to short covering (this is when short sellers unwind their positions by buying back shares). Although, this kind of gain tends to be temporary.

VRX Stock Problem No. 2: Core Issues With the Business

When you take a deeper look at the latest earnings report, you’ll see some worrisome problems with the business. After all, the revenues fell by 11% to $2.11 billion.

And yes, this should not be a surprise. The company has been in turmoil for some time and even its best assets, like Bausch + Lomb, have languished. It is actually the No. 4 player in the industry for contact lenses, behind companies like Cooper Companies Inc (NYSE:COO), Johnson & Johnson (NYSE:JNJ) and Novartis AG (ADR) (NYSE:NVS).

Let’s face it, there have been lots of disruption as VRX has scrambled to unload various assets. Hey, Valeant Pharmaceuticals is considering changing its name because the brand has been tarnished. According to InvestorPlace.com’s Richard Saintvilus: “Valeant has become synonymous with corporate greed, price gouging and a host of other legal headwinds…”

But the company also faces extreme competition. If anything, VRX’s rivals probably see an opportunity to take advantage of a beleaguered operator. In the latest quarter, the company’s U.S. diversified business saw revenues plunge by 37% to $355 million — primarily from the impact of generics.

VRX Stock Problem No. 3: Core Issues With the Business

Perhaps the biggest problem with VRX stock is the company’s massive debt load, which is at about $28.5 billion. Granted, the company still has assets to sell off. But given the overall weakness in Valeant, it could be tough to fetch strong valuations.

At the same time, the company faces substantial liabilities for fines and other legal actions. So a large judgment could make it even tougher to pay off the debt.

According to InvestorPlace.com’s Vince Martin: “The short version of the fundamental story here still implies that Valeant is at substantial risk of heading to zero. The high end of full-year adjusted EBITDA guidance ($3.75 billion) against $27 billion-plus in net debt implies a leverage ratio of about 7.3x. Generally, it’s difficult to refinance at a level above 5x; with declining profits, it’s all but impossible even at those levels.”

In light of all this, it really should not be surprise that Ackman ultimately threw in the towel on VRX stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companiesFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


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

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