Most of the coverage of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock over the past 18 months has focused on the negatives surrounding VRX stock. That’s unsurprising, because Valeant Pharma has a long list of negatives.
There are concerns about past pricing strategies and future litigation or regulatory penalties. There’s the nearly $30 billion in debt, which raises questions as to whether Valeant stock might head to zero. And that debt has led to endless analysis and speculation about whether Valeant can sell enough assets to satisfy creditors — and if it can do so soon enough.
The focus on Valeant’s negatives — primarily its balance sheet and regulatory risk — seems to miss a key part of the story, however. Even if Valeant somehow can buy more time by refinancing its debt, there’s a key problem here — the assets themselves just aren’t that attractive.
Bausch & Lomb: A Driver for VRX Stock?
One of the larger “will they or won’t they?” questions surrounding Valeant Pharma is whether the company will sell its Bausch & Lomb business. Valeant acquired B&L for $8.7 billion back in 2013, and the business now is considered one of VRX’s “trophy assets.”
The decision regarding a B&L sale usually is framed relative to the company’s debt load. Assuming modest appreciation in the value of the business, a $10 billion sale of Bausch & Lomb could erase fully one-third of VRX debt. Of course, that sale would also remove a significant amount of profit from the Valeant Pharma bottom line — perhaps hurting its ability to refinance the remaining debt.
But it’s worth remembering that while B&L has value, it’s hardly a great business. The company is fourth in contact lens market share — and a distant fourth. Johnson & Johnson (NYSE:JNJ) is the market leader with 40% of the market, according to figures disclosed by Cooper Companies Inc (NYSE:COO). Novartis AG (ADR) (NYSE:NVS) unit Alcon is close, with both Cooper and Alcon owning 23%-24% of the market.
B&L, meanwhile, has just 9% — a figure that appears to have declined under Valeant ownership. For all the drama about whether or not VRX will sell B&L, any investor who wanted exposure to the stable growth in contact lenses would be much better off simply buying COO. And the fact that one of Valeant Pharma’s best assets is in fourth place with single-digit market share shows just weak the overall portfolio is.
The Other Valeant Pharma Businesses
The other businesses don’t look hugely attractive either. Valeant itself expects its U.S. Diversified Products business to see revenue declines of 8%-10% per year through the end of the decade. That business generated ~20% of 2016 sales, and will be a drag on growth for some time going forward.
Valeant is projecting 8%-10% growth in its Branded Rx business — but that seems highly aggressive. Fully 30% of revenue in that segment comes from Xifaxan, an IBS-D treatment whose patent has been challenged. The rest of the portfolio is mostly smaller drugs, and two of 2015’s top four (Jublia and Glumetza) saw sales drop sharply in 2016.
Here, too, there’s a “why VRX stock?” question. There are better drug companies out there from a number of standpoint. Gilead Sciences, Inc. (NASDAQ:GILD) has concerns about its Hep C vaccine, but its stock trades much cheaper and there’s little, if any, real risk of bankruptcy. Diversified majors such Merck & Co., Inc. (NYSE:MRK) and Pfizer Inc. (NYSE:PFE) have their own portfolio challenges and the same industry-wide risks as VRX or GILD — but with diversification and dividends to boot.
Valeant Stock Is ‘Too Hard’
As interesting as the debate over VRX stock is, it’s simply difficult to justify taking a side — particularly a long position. Put aside the $30 billion in debt and the regulatory investigations. This isn’t a great business. The best drug in the branded portfolio is at risk of losing its patent. B&L is in a distant fourth place in market share. And generics are a tough business in any environment, let alone the current political climate.
A turnaround of Valeant Pharma isn’t guaranteed. There’s a material chance the company could be bankrupt within a few years. Investors willing to bet on that turnaround, or that there’s a light at the end of the tunnel, need to remember what they’re betting on.
There’s a reason Bill Ackman exited his position. Ackman was one of the company’s largest shareholders, and one of the company’s most vocal supporters in the past. But even he realizes the truth at this point: even a ‘fixed’ Valeant isn’t worth waiting for.
As of this writing, Vince Martin had no positions in any securities mentioned.