One of the big investment assumptions during the “Age of Trump” is that the cat’s away and the mice can play. The current rally is based largely on the belief that cutting regulations (or taking cops off the business beat), will result in growth and new fortunes. If that were a guarantee of wealth, then the companies that played fastest and loosest over this decade, like Valeant Pharmaceuticals Intl Inc (NYSE:VRX), should be rocketing upward.
Instead, VRX stock is coming apart at the seams. Analysts were expecting $1.24 per share of earnings, and hoping for $1.27 per share, on $2.35 billion when the company reported early on Feb. 28.
That’s pretty much what the company delivered, non-GAAP earnings of $1.26 per share for the quarter and revenues of $2.403 billion coming in ahead of expectations.
VRX stock fell anyway; an initial plunge below $15 per share being grabbed by bargain hunters, with a price in the afternoon of $15.03. That’s a market cap of $5.3 billion, slightly more than half the reported $9.67 billion in revenues. It’s the kind of ratio you’d expect from Costco Wholesale Corporation (NASDAQ:COST), not a drug stock that peaked at 20 times its current level in 2015.
Time Is Running Out for VRX Stock
Debt happened. Patent rights happened. More than half of Valeant’s assets are subject to debt — $30-plus billion at the end of September. And the $1.2 billion of debt retired in 2016 just isn’t enough, with interest rates rising. You can see the lack of faith in Valeant’s bonds — a 5.5% issue due for repayment in 2023 is now priced at 81 cents on the dollar.
Valeant is continuing to put assets on the market, but they aren’t fetching the values that brought hedge fund investors like Bill Ackman to the party. (Ackman’s Pershing Square Capital Management still held over 5% of VRX stock at the end of 2016; John Paulson’s Paulson & Co. held even more; and Jeffrey Ubben’s ValueAct Capital also holds a big stake.)
Valeant says it will sell $5 billion in assets this year, but the units it has put on the market are only fetching bids of $2.1 billion so far. Worse, patent rights are expiring on some of its drugs and Addyi, a “female Viagra,” is looking like a dud.
Arbitraging Tax Laws Over?
Valeant’s game under former CEO Michael Pearson was simple. Buy drug companies, hike prices and ship the profits overseas, or at least to Canada, where they would be taxed lightly.
The game of arbitraging tax laws is going to end if tax reform drops U.S. rates. The price-hiking game is going to end as biosimilars and other competitors come to market, and as more competition comes in generics, where patent rights have expired.
One former bull, who wrote in November 2015 that a “fire sale” price for Valeant’s pieces would bring $100 per share, now has the pieces valued at $16 per share. People who make those kinds of estimates don’t get out with their reputations intact.
Bottom Line on VRX Stock
While I have been down on VRX stock through its problems, screaming sell VRX stock near its top, I made a mistake in January, calling the present company breakup gold and comparing its equity to the value of its parts. You were better off listening to Josh Enomoto.
Valeant is now in the position of a guy at a pawn shop who wants to sell his gold watch to pay gambling debts. The buyers know they can lowball him, and they know they can lowball Valeant as well.
Buy the people who buy the pieces of this wreck. Don’t waste any more money on a bad debt.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.