It remains to be seen if John Paulson’s presence on the board of directors of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) will make a positive difference for the beleaguered company. But as far as owners of VRX stock are concerned, it will only help.
VRX shares popped 7% on Monday following the news … a much-needed lift for a stock that, as of the end of last week, was down more than 95% from its late-2015 high.
Still, one can’t help but wonder how much Paulson can do that the company wasn’t already trying to do for itself under relatively new CEO Joseph Papa.
A Tall Order
The name should ring a bell. John Paulson is the chief of hedge fund Paulson & Co., which rose to infamy after making a (very) correct bearish call on the U.S. housing market in 2007.
Not all of his picks have been winners, though. He’s actually down $2 billion on a bet he made on VRX stock last year. He also made similar bets on fellow pharmaceutical giants like Allergan plc Ordinary Shares (NYSE:AGN), Mylan N.V. (NASDAQ:MYL) and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Paulson pared back on all those positions last quarter, but is essentially doubling down on Valeant by joining its board.
Unlike most activist investors, Paulson doesn’t appear terribly interesting in meddling much. He said in a statement posted Monday morning:
“The strategic plan to transform Valeant smartly focuses on rebuilding the company’s core franchises in ophthalmology, dermatology and gastroenterology while simultaneously using the proceeds from the sale of non-core assets and operating cash flow to de-lever the company. I am fully supportive of the strategy and leadership team at Valeant.”
That sale of assets Paulson referred to is Papa’s plan to take a bite out of more than $30 billion worth of company debt hedge fund manager and former board member Bill Ackman helped the company rack up. Papa aims to reduce that figure by $5 billion by early 2018, and is roughly halfway there. Last month it sold three of its skincare lines to L’Oreal SA (ADR) (OTCMKTS:LRLCY), and divisions like Dendreon and Paragon are also on their way out.
It may not be enough alone, however, to give the organization the financial flexibility it needs. The first quarter’s interest expense was $471 million, versus operating income of only $211 million.
The only plausible way Valeant Pharmaceuticals can become meaningfully viable again is to grow its top line, as Paulson alluded. Even that, however, would be an incredible and perhaps unreachable feat if the previous quarter’s results are any indication.
Sales of Xifaxan — which was the core reason the company bought Salix back in 2015 — were off by 11% on a year-over-year basis. Branded drug sales slipped 10%, while revenue generated by its broadly-defined “diversified” product base stumbled 36% from the same quarter a year earlier.
In other words, with or without Paulson’s presence, Valeant has its work cut out for it.
It’s not out of the realm of realism to suggest Paulson may be more interested in doing damage control for a trade gone bad than he’s a believer in the company’s prospects. He still owns 19.4 million shares of VRX stock, or 5.7% of the company and could torpedo the stock if he tried to scale out of his position.
Looking Ahead for VRX Stock
Valeant CEO Papa was also superficially upbeat about Paulson’s presence on the board, saying:
“With his significant business and financial expertise, John will be a strong addition to the board. His experience will be especially valuable as we continue to execute on our transformational strategy to turn around Valeant.”
They’re the right words to say to investors. And the relationship between Papa and Paulson appears to be legitimately amicable. Both seem to be on the same page, and odds are good Paulson would have voiced dissent before now were he not pleased with the direction the organization was moving.
Nevertheless, optimism doesn’t pay the bills. The sale of assets also sheds revenue-bearing products, and the ophthalmology, dermatology and gastroenterology pharmaceuticals the company remains most committed to didn’t exactly have the best quarter. In the meantime, its younger, developmental drugs Siliq and Addyi are both up against some fierce competition and/or problems unique to each. Palatin Technologies, Inc. (NYSEMKT:PTN) is working on a female libido drug that will compete with Addyi, and Siliq’s label comes with a suicide warning … a little extreme for a psoriasis treatment.
Unless Paulson’s been working on some new blockbuster drugs of his own in his basement, adding him to the board may not help Valeant’s results or VRX stock enough to matter.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.