During the past six months or so, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been regaining some of its footing. CEO Joe Papa has wasted little time in cutting costs, streamlining the business and unloading of VRX stock’s assets. During this wrenching process, he has had to deal with litigation as well as the loss of a major shareholder, Bill Ackman.
And all in all, Wall Street has responded positively. Since April, VRX stock has rallied from $8.60 to $12.81.
So, what now? Is the company really back on track?
Well, I would be very cautious. For the most part, VRX faces tremendous challenges. Consider that Papa indicated during the latest earnings call that the turnaround process will likely take a couple years.
OK then, what are the risks? Here’s a look at three major issues that have yet to be resolved and could mean further deterioration for VRX stock.
VRX Stock Problem #1: Massive Debt
While VRX has made progress in paring its debt, the fact is that the amount is still enormous. It is roughly $25.5 billion (this assumes the reduction of $920 million from the sale of the iNova Pharmaceuticals business). By comparison, Valeant stock has a market value of only $4.5 billion. In other words, the capital structure is essentially upside down.
Even though VRX has been trying to refinance the debt and push out the payment timelines, there are limits to this. Note that close to $6 billion will come due during 2020. And it seems like a good bet that, given the strained condition of VRX stock, the debtholders will want to make sure they get their money in a timely manner.
After all, a key part of the debt-reduction strategy is to sell off about 12 more business segments. However, M&A can be very dicey, as VRX has already faced troubles with some of its deals.
VRX Stock Problem #2: Litigation
In VRX’s latest SEC filing, there were 12 pages devoted just for litigation! Granted, some of the cases were a normal part of being a pharma company.
Yet, there are some actions that could ultimately prove quite debilitating, such as investigations, disputes and legal proceedings regarding the company’s prior relationship with Philidor. They involve potential issues like racketeering (under the RICO statute) from governmental agencies.
So far, VRX has set aside $162 million for the legal exposure. Although, this could ultimately prove below what’s necessary because of intense scrutiny of the pharma industry.
VRX Stock Problem #3: Growth Problems
On a quarterly basis, VRX pays out over $400 million in interest payments. There are also the ongoing legal costs to handle the spate of lawsuits. The result is that VRX does not much cash left over to help fund its growth efforts. This is particularly troubling since there are many healthcare operators, such as Gilead Sciences, Inc. (NASDAQ:GILD), Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK), that have massive balances sheets that can target opportunities. For example, as for VRX’s R&D budget, the expenditures came to only $172 million during the first six months of this year, down from $210 million in the same period a year ago.
In light of this, it should not be surprising that VRX has a fairly weak pipeline of drugs. What’s more, the existing offerings are also far from robust. For the first half of this year, revenues dropped by 9% to $4.3 billion. Some of the drivers included pressures with the U.S. diversified and branded RX segments (as there was a loss of exclusivity on various products, such as in dermatology), as well as the impact from the divestiture program.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
