Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is back in style. VRX stock has doubled off the lows from earlier this year. That’s a welcome change after a terrible run since mid-2015. It plunged from $250 at its peak to just $8 earlier this year. Long-time Valeant investors have suffered a severe ride. However, other investors’ pain can often lead to profits for people with the courage to buy after the crash.
Since April, Valeant stock has shot up. The company has rebounded on the strength of asset sales, improving guidance and a better outlook for the pharmaceutical industry overall. With VRX stock near the midpoint between its 52-week high and low, do current trends favor the bull or bear perspective?
VRX Stock Cons
Low-Priced Asset Sales: Valeant continues to sell off so-called non-core assets. That’s a key part of the plan for paying down the excessive debtload. However, Valeant is a forced seller, and as such, it isn’t realizing good prices on its assets. When in growth mode, Valeant could overpay for acquisitions. It didn’t seem to lead to trouble, since VRX stock was highly valued and thus served as solid currency. Additionally, creditors happily extended the company more loans, given its seemingly rosy numbers.
That process has now gone in reverse. This Monday, Valeant sold off Obagi Medical for just $190 million. It paid $360 million for Obagi in 2013. That’s a serious loss on their investment. Additionally, Valeant received just over 6x EBITDA for Obagi. Bulls assume Valeant’s overall business is worth far more than 6x. The equity would likely be wiped out if the whole business is sold at that price. Thus, it’s far from reassuring to see assets like Obagi sold off at low valuations.
JP Morgan Negative: JP Morgan’s analyst Chris Schott remains firmly skeptical of the recovery in Valeant stock. Schott grants that Valeant has generated some positive business developments in recent months, but he isn’t convinced that the company has turned the corner.
He wrote recently that: “However, stepping back from these events and re-focusing on business fundamentals, we continue to see only limited signs of a turnaround in Valeant’s core franchises (Salix, B&L, derm)”. Given the weak prices for recent asset sales, Valeant desperately needs the core franchises to pick up steam. And, at least according to Schott, it simply isn’t happening.
For what it’s worth, JP Morgan isn’t the only big bank with a skeptical outlook. Wells Fargo just piled onto Valeant, hitting the firm with a nasty $9 price target, suggesting almost 50% downside from current levels.
Huge Debtload: Despite Valeant’s laudable efforts to reduce its debtload, the company remains weighed down by its obligations. The company has paid off about $3.6 billion in debt in recent quarters.
That may sound impressive. However, it moves the company’s overall burden from $32 billion to $28 billion, still a gigantic amount. Piecemeal asset sales, particularly at low EBITDA multiples, such as has happened with Obagi and Inova, do little to reduce the firm’s leverage or improve its credit rating. Yes, the company has made progress, particularly in rolling over debt. That said, the situation remains critical.
VRX Stock Pros
New Management: Many folks bearish on Valeant claim the company’s business model is unworkable. This was likely true in the past. However, many bears seem to miss the fact that the board has replaced the old management team and business model.
The company replaced both its CEO and CFO last year. New CEO Joe Papa is a particularly impressive hire, since he served as the CEO of highly successful generic pharma Perrigo Company plc Ordinary Shares (NYSE:PRGO) for a decade before accepting the Valeant role. If VRX stock was undoubtedly heading to zero, as some bears claim, it is unlikely such an accomplished executive would accept the challenge of turning the firm around.
Ackman Overhang Gone: Along with new management, Valeant has a changing shareholder base. Bill Ackman is among the notable sellers. And, given his recent baggage, that’s probably a good thing. Buyers, including Carl Ichan, ran Ackman over in his infamous Herbalife Ltd. (NYSE:HLF) short position. And his failed attempt to turn around struggling retailer J C Penney Company Inc (NYSE:JCP) probably accelerated that firm’s decline.
One of Ackman’s big winners had been Valeant stock, as he rode it on the way up. He failed to detect the company’s controversial business practices, however, and ended up taking a massive loss. Ackman cut loose his whole Valeant stake earlier this year around $11/share, suffering a 96% — $4 billion — loss. Many folks avoided Valeant stock since he was involved and knew he’d have to sell sooner or later. With him out of the picture, it has helped foster the turnaround story.
Healthcare Bill Delayed: Investors had been selling healthcare stocks in the wake of political developments earlier this year. There are positive signs on this front though, given the disunity within the Republican Party.
An earlier attempt at a healthcare overhaul failed to get enough votes. Republicans have now delivered a second draft of healthcare reform, but it is stalled in the Senate at the moment. It’s at least one vote short of necessary for passage.
Drug stocks popped in June on the reading of the latest draft of the Republicans plan. And even that version may not become law. The longer the bill takes to pass, the less likely it will be that it makes any major changes that would harm Valeant and other pharma firms materially.
Verdict
Valeant certainly is making the right moves to try to turn the firm around. Investors are rewarding the new management team’s efforts accordingly. However, at this point, sentiment seems to be running far ahead of actual progress. The massive debtload remains, and asset sales thus far have been small and at generally disappointing valuations. Until Valeant’s core business regains more steam, the stock is more of a gamble than a solid investment.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
