There are tons of reason to be skeptical about Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock ahead of its second-quarter fiscal 2017 earnings results before Tuesday’s opening bell. For example, VRX stock faces a massive debt pile of $28.5 billion, versus just $1.5 billion in cash.
But it would be a mistake to judge VRX solely by today’s metrics. The embattled drugmaker continues to make operational improvements, including divesting various non-core assets to lower debts.
These moves have helped Valeant last quarter to not only deliver its first profit in six quarters, the company also raised guidance for 2017. And the market has begun to take notice.
Where VRX Stock Stands Today
Since falling to a 52-week low of $8.31 on April 24, Valeant stock has skyrocketed as much as 118%, reaching $18.17 on July 25. While the shares have shown evidence of bottoming out, profit-taking has caused a 16% pullback in VRK stock, which closed Friday at $15.13. On Tuesday, the market will want further confirmation that the company has successfully reset the business and can evolve from “work in progress” to sustainable growth.
These are a couple of the many questions investors want answers to before placing a long-term bet on Valeant, which lost 10% of its value last week, driven by the worst-than-expected earnings results from rival Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), whose shares last week fell off a cliff by more than 36%, causing an almost 5% drop in the VanEck Vectors Pharmaceutical ETF (NASDAQ:PPH).
But with a top- and bottom-line beat Tuesday, VRX can show that Teva’s issues are its own to deal with.
Expectations for the Quarter
For the three months that ended June, Wall Street expects Valeant Pharmaceuticals to earn 97 cents per share on revenue of 2.24 billion. This compares to the year-ago quarter when the company earned $1.40 per share on $2.42 billion in revenue. For the full year, ending in December, earnings are expected decline 34.5% year-over-year to $3.58 per share, while full-year revenue of $8.7 billion would be a 9.6% decline YOY.
VRX Has a New Formula
The company has reversed its strategy, which since its founding almost three decades ago, was to become a pharmaceutical powerhouse by picking off smaller or failing drug companies. Once under its umbrella, Valeant would push the newly acquired products through into its own supply stream and then jack up the prices, helping them dominate the manufacturing space. This strategy, which catapulted VRX to become Canada’s most valuable company, trading north of $300 in the summer of 2015, isn’t the case today.
Today’s Valeant, which has committed to reducing its debt burden by $5 billion by January 2018, is about scaling back operations, leading the company to complete its third divestiture this year alone — more recently selling its iNova Pharmaceuticals business to funds owned by Pacific Equity Partners and The Carlyle Group for $930 million in cash. That deal follows Valeant’s sale of Dendreon to Sanpower earlier this year for $820 million in cash. The company also announced the sale of three skin related brands to L’Oreal SA (ADR) (OTCMKTS:LRLCY), which fetched just $168 million.
All told, through various asset sales, Valeant has trimmed its debt by $4.8 billion since Q1 2016. And the company, which on July 13, announced that it redeemed the remaining $500 million Senior notes due in 2018, has also created much-needed breathing room in terms of debt. As it stands, Valeant will have no significant debt maturities through 2019. And when factoring it will have no mandatory amortization requirements, VRX can — for the time being — invest in growth. And, if the management decides to use this valuable time to accelerate its debt reduction plans, that would work well too.
Bottom Line for Valeant
VRX stock still has tons of deficits to overcome. Not the least of which is the fact that, while the company is aggressively working to lower its debt, it is not making the investments needed to grow the top line. And these lack of investments would invite competitors to encroach on its territory.
That said, the debt reduction helps lowers Valeant’s risk profile, which should sustain the stock’s rise towards $20 in the next 12 to 18 months, delivering 32% returns. And a top- and bottom-line beat on Tuesday can be the catalyst VRX stock needs to move higher.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
