Investors are expecting next to nothing new when Valeant Pharmaceuticals International, Inc. (NYSE:VRX) reports quarterly earnings on November 7. The stock lost around one-fifth of its value in the last month. Even as management sheds assets, raises cash to pay off debt, and restructures its business to run more effectively, the stock is drifting lower. What will it take for VRX stock to recover?
Analysts Target VRX at $21
Analysts have, on average, a $21.50 price target on the stock. More recently, on October 30, BMO Capital’s Gary Nachman was the latest analyst to issue a report on Valeant. Nachman has a success rate of 55% and an average return is 7.4 percent in the last two years. He set a price target of $16 and ranks the stock a “hold.”
The company will need to report revenue growth in both its Bausch + Lomb division and at Salix Pharmaceuticals. It is too early to predict how well B+L performed in the quarter. The eye care unit announced several new products and approvals in the last month. On Oct. 24, the FDA cleared B+L’s software and hardware for its Victus laser platform. Before that, B+L introduced a next-generation lens used for enhancing optic recovery following delivery.
To spur sales, B+L must aggressively push discounts and reward programs. In July, the company created a rewards program that gives patients rebates and loyalty points when they bought contact lenses. Near-term, such promotions will cut into profits but will give revenue growth a boost.
VRX’s Salix Builds IBS-D Awareness
To encourage the discussion around the embarrassing topic of Irritable Bowel Syndrom, Salix recommended doctors and patients to appear on Lifetime Channel. Operationally, Salix is prepared to grow sales. It grew its sales force to more aggressively build Xifaxan’s market share. Last quarter, Salix’s organic revenue grew a respectable 16%, helped by Valeant’s investment in a new primary care sales team. Salix volume also grew 3.5% year-over-year on stronger demand for Xifaxan. If the momentum continues from the sales team’s good performance, then it is possible that revenue grew again in the third quarter. Watch for the total prescriptions for Xifaxan rising and compare that to the 2% prescription growth last quarter.
Relistor and Apriso are two other drugs whose prescriptions grew 7% and 33%, respectively. While prescriptions may grow, revenue growth from these drug names, along with Xifaxan, may lag. Salix may have little room to raise prices at this time as the company chases market share over profits.
Improving VRX’s Leverage Ratio
Asset sales during the quarter will help Valeant cut its leverage ratio, but not right away. The company does not want to sell assets at below a market value. It only needs to generate cash from sales gradually, to lower its debt and leverage ratio. But Valeant has time to lower that ratio. Generating higher cash flow and growing adjusted EBITDA are the best ways for supporting the high debt.
Valeant’s new product pipeline is a big source for accomplishing higher cash flow growth in the long-term. Within its late-stage pipeline, 80 percent of the programs are targeted for launch between 2017 and 2019. Valeant’s investments in Siliq and Aqualox could pave the way for future growth. But investors need patience. It takes many quarters of investments and operational adjustments to grow sales for new drugs.
Valeant scares away most traditional investors because its turnaround is anything but assured. CEO Joe Papa is doing a good job so far in stabilizing the balance sheet. If he and his newly hired management team deliver, investor patience will pay off.
The author holds no position in VRX stock.
