Has embattled drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) finally bottomed? Can VRX stock ever be trusted again? These are just two of the many questions investors want answers to before placing long-term bets on the shares.
Since falling to a 52-week low of $8.31 on May 8, shares of the Canadian company have been on fire, skyrocketing as much as 120% to $18.25 on June 29. The market seems willing to bet that Valeant — which in the first quarter posted its first profit in six quarters and then raised guidance for 2017 — can not only sustain its operations but thrive.
By selling off some assets to service its debts, Valeant has slashed liabilities by $1.3 billion. It did this even though revenues, which fell 11% in the first quarter, remain under pressure. But that, too, could soon change given that the Trump administration is considering easing restrictions on drug prices, which would give the pharma industry the freedom it needs to operate.
But does any of this mean that Valeant — with its $28.5 billion of debt as of March 31 it still must contend with — is out of the woods?
VRX Reversing Course
Valeant Pharmaceuticals has reversed its strategy, which since its founding almost 30 years ago was to become a pharmaceutical powerhouse by picking off smaller or failing drug companies. Once under its umbrella, Valeant would push the newly acquired products through into its own supply stream and then jack up the prices, helping it to dominate the manufacturing space.
The strategy attracted a significant level of bad PR that made the company synonymous with price gouging. It also resulted in massive amounts of debt.
Now Valeant — once Canada’s most-valuable company, trading north of $300 in the summer of 2015 — has seen the light.
The company just completed its third divestiture this year. It recently sold its iNova Pharmaceuticals business to funds owned by Pacific Equity Partners and The Carlyle Group for $930 million in cash. iNova — which has a strong presence in Australia, South Africa and Asia — markets a portfolio of prescription and over-the-counter products that focus on pain management, cardiology, coughs, and weight management.
That deal followed Valeant’s sale of Dendreon to Sanpower earlier this year for $820 million in cash. The company also sold three skin-related brands to L’Oreal SA (ADR) (OTCMKTS:LRLCY), which fetched just $168 million. All told, these deals have helped Valeant pay down $1.5 billion in debt since the start of the year.
But with revenue-generating assets leaving the portfolio, where will the company find its top-line growth?
Mixed Analyst Opinions
Analyst Timothy Chiang of BTIG LLC thinks Valeant “will try to sell more of their business segments if they can get good multiples.” “But I don’t see a lot of growth in the company if they keep selling assets,” he recently told clients.
Not all Wall Street seems to be worried, however, including Louise Chen, Cantor Fitzgerald & Co. analyst, who recently raised her price target on VRX to $23 from $18, citing multiple expansion opportunities.
“We think this is deserved because Valeant’s execution has continued to meet or exceed our expectations,” Chen wrote in a June 28 note. Citing the strong execution of CEO Joe Papa and CFO Paul Herendeen, Chen insists the executives “can return the company back to growth.” Her price target, which implies 33% upside, suggests there are no near-term risks.
Still, investors should nonetheless be careful here.
Bottom Line for VRX Stock
With the size of the debt on the balance sheet, the laundry list of things management needs to do to repair Valeant is long. On the positive side, the recent non-core asset sales are helping trim liabilities.
But by racing to reduce its debts, it also means that the company is underinvesting in areas such as research and development — areas that would likely help it compete when it fully recovers.
Which brings us to the big question: Has VRX stock bottomed? Obviously a jump of 120% from the low is pretty telling. But Valeant will still need to demonstrate it can consistently execute on its revenue, profit and debt-deducting metrics without mortgaging its future.
As such, now would be an ideal time for those who bought at the lows to take some profits off the table. For others who are looking at Louise Chen’s $23 target and see the recent $16.50 share price as an entry point, good luck.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.