I argued heading into the Q1 earnings report from Valeant Pharmaceuticals Intl Inc (NYSE:VRX) that the recent rally was unlikely to last. Given that VRX stock is up by double digits this morning, the market would seem to disagree for the moment.
Valeant had seen some modestly good news heading into earnings. The company paid down debt early after an asset sale to L’Oreal SA (ADR) (OTCMKTS:LRLCY) closed ahead of schedule. The launch of psoriasis drug Siliq and the approval of surgical platforms in the Bausch + Lomb optical unit offered incremental contributions to sales and earnings.
It hardly seemed like enough to really move the needle for VRX stock, though, or to support 20%-plus gains. Investors appeared to be on the same page, selling shares off by almost 4% on Monday.
But Valeant Pharmaceuticals delivered a seemingly encouraging report on Tuesday, including raised full-year guidance, that is pushing VRX shares 15% higher in premarket trading.
The question now is whether Q1 was enough to change the overall story for Valeant Pharmaceuticals in the long-term. And while Wall Street is saying something different right now, I still believe the answer is “no.”
Good News for Valeant Pharmaceuticals?
The early jump in VRX stock seems overly optimistic at first glance.
Revenue actually missed Street expectations, declining 11% year-over-year to $2.109 billion, shy of estimates for $2.13 billion. The headline many outlets are reporting is that Valeant swung to a profit, which it did, but GAAP profits of $1.80 per share, against a $1.09 loss the year before, benefited from an unforeseen tax benefit.
That tax benefit is unlikely to be turned into cash any time soon — if ever — since Valeant Pharmaceuticals already is posting GAAP losses.
Meanwhile, adjusted net income of $273 million declined 38% year-over-year. On a per-share basis, they came to 78 cents per share, missing Thomsan Reuters I/B/E/S estimates by 4 cents. Adjusted EBITDA fell 13%.
Raised full-year guidance on the latter basis seems to have driven some of the morning’s optimism. But a hike of just $50 million at the midpoint of guidance seemingly does little for a company that still has $27.4 billion in debt net of cash.
There is a sense that Valeant Pharmaceuticals’ Q1 could have been worse. But there’s a big jump from there to claiming the quarter as a victory.
Concerns Persist for VRX Stock
Meanwhile, behind the headlines, there’s more bad news for Valeant.
Bausch + Lomb – the supposed “trophy asset” acquired by Valeant Pharmaceuticals in 2013 for $8.7 billion — grew revenue less than 1%. In comparison, Cooper Companies Inc (NYSE:COO), with a larger market share in contact lenses already, grew revenue 11% in its fiscal Q1 (ending January). B + L revenue actually declined year-over-year in the U.S., implying further share losses for a business already in fourth place behind Cooper, Johnson & Johnson (NYSE:JNJ) and Novartis AG (ADR) (NYSE:NVS).
In Branded Rx, sales fell 9%. Pricing did improve — one positive given Valeant’s need to lower prices after negative publicity over the past few years. But generic competition and higher managed care rebates (both long-term problems) were cited as headwinds.
And in U.S. Diversified Products, revenue declined some 37%, due to lower volume and lower prices. The weakness in that business caused the 13% decline in Adjusted EBITDA – and lower margins.
It’s Not Enough
All told, there’s little in the Q1 report to change the story for VRX stock.
The short version of the fundamental story here still implies that Valeant is at substantial risk of heading to zero. The high end of full-year Adjusted EBITDA guidance ($3.75 billion) against $27 billion-plus in net debt implies a leverage ratio of about 7.3x. Generally, it’s difficult to refinance at a level above 5x; with declining profits, it’s all but impossible even at those levels.
Valeant Pharmaceuticals still needs to either grow EBITDA — which seems nearly impossible in the short term — or cut debt by at least $10 billion. But beyond the pending sale of Dendreon for $820 million, it’s hardly clear where that incremental $9 billion-plus is coming from. A $5 billion target in debt reduction by next year is two-thirds complete. B + L in theory could fetch that $10 billion — but it now drives more than half of total Valeant sales, and the company can’t afford to sell it.
Nothing in Q1 changes that problem. Weaker-than-expected revenue doesn’t help. The incremental ~$50 million in expected profit represents 0.2% of Valeant’s debt load. What looks like a disappointing quarter might limit the ability to sell Bausch + Lomb — one of the few, if unpalatable, options Valeant Pharmaceuticals has left.
All told, this still is an overleveraged company with an untenable debt load. A tax-aided profit doesn’t change that — and I’m skeptical that it will do much for VRX stock for very long.
As of this writing, Vince Martin had no positions in any securities mentioned.