Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is getting belted in Tuesday’s trading after a disappointing first-quarter result — and that spells opportunity in VRX stock for investors with the proper constitution.
For its Q1, Valeant lost $373.7 million, widening its red ink from just $97.7 million in the year-ago period. Adjusted for certain items, earnings of $1.27 per share came a dime short of analyst estimates. Revenues did manage to head higher, from $2.17 billion to $2.37 billion, but that was $100,000 short of expectations.
But perhaps the most dismal news was that VRX revised down full-year guidance to between $6.60 and $7 per share on revenue between $9.9 and $10.1 billion — those figures initially were $8.50 to $9.50 per share on sales of $11 to $11.2 billion.
The figures did very little to calm investor fears over Valeant’s uncertain future and added to worries that the firm won’t be able to overcome its $30 billion worth of debt. That translated into a 15% premarket drop in shares to around $29 per share — a far cry of the nearly $260 per share price that Valeant shares commanded at this time last year.
With VRX stock up against the ropes, some speculative investors might be considering the struggling pharmaceutical firm — especially with a new CEO at the helm.
We’ll look at whether Valeant stock is worth it:
Can Papa Steer Valeant Forward?
One of the biggest question marks that VRX investors are facing is whether or not newly appointed CEO Joseph Papa will be able to turn things around for the struggling pharmaceutical firm.
Many are skeptical given that he used to head up Perrigo Company PLC (PRGO), which has seen its shares have fall nearly 50% over the past year.
While Papa may not have a great track record for increasing shareholder value, his presence may be just what VRX needs.
You see, this year’s presidential elections have shined a spotlight on the pharmaceutical industry, and not in a good way. Candidates are promising to reform the healthcare space by passing new legislation that will clamp down on drug-makers’ abilities to raise prices.
This is bad news for Valeant, as the firm’s previous business model essentially involved buying up smaller firms and immediately increasing their drug prices. Valeant’s track record of acquiring drugmakers and then raising the cost of their products has been under the microscope in recent months.
Many expect that the firm will have to abandon that practice once regulators have concluded their probes.
This is where Papa’s skill set comes into play.
While VRX won’t be able to use its old business model any more, the firm can still make money through acquisitions. Instead of buying and immediately raising prices, Papa plans to take a more long-term approach to strategic acquisitions. He demonstrated his ability to achieve growth through acquisitions at Perrigo and he is expected to take a similar path at Valeant.
That kind of leadership is exactly what VRX needs right now, so although Papa hasn’t been hailed as a night in shining armor on Wall Street, the change in management is likely to help change the firm’s direction and boost its share price.
The Debt
Perhaps the most worrying thing about owning VRX stock is the company’s massive debt burden.
At the moment, Valeant is saddled with more than $31 billion worth of debt. Even more troublesome is the fact that the company has already maxed out its credit lines after delaying its 10-K filing. That leaves asset sales and product growth as options for paying down debt.
This is a precarious position, as VRX will have to find a way to dump assets for the cash it needs to reduce its debt load, but without giving up too much future growth.
Not only that, but VRX is unlikely to get a good price for its assets as the firm is already in so much distress.
Bottom Line on VRX Stock
Valeant has a lot of problems, but at under $30 per share at this point, it’s bargain-priced — at least for speculative investors with a strong stomach for risk. If Papa is able to turn things around, this momentum stock will be a source of explosive growth.
Until then, though, it will be a source of explosive volatility.
As a long-term play, VRX stock is faced with too many uncertainties. The pharmaceutical industry as a whole is in a worse place than it was 12 months ago. Add to that Valeant’s questionable business model, accounting errors and sizable debt, and you get a very high-risk investment.
If you’ve got money to spare for a swing trade, a play on VRX stock makes a lot of sense considering today’s lows. But longer-term investors looking for an allocation in the healthcare part of their portfolio would be better off sticking to the larger, more stable players.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
