Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is continuing the slow, painful process of unwinding from its debt and becoming a regular drug company.
Its third quarter report was widely cheered by investors, the stock shooting up $2 per share overnight after it showed an operating profit of $37 million, which ballooned to net income of $1.3 billion after taxes. Speculators bid it as high as $15.68 per share from a pre-earnings low of $11.03.
The earnings report also showed that long-term debt continued to drop, to $26.2 billion from almost $30.4 billion a year ago, and the company raised another $750 million in debt to push off repayment of other notes by three years.
It’s all good news. Management under CEO Joseph Papa is making good on its promise of survival. But the good news hasn’t necessarily made Valeant a good investment.
Bulls Return to Pasture
Still, the progress was enough for some bulls to return to the Valeant pasture and graze on gains, with hope for more to come.
Hopes hinge on better sales for Xifaxan, a drug for irritable bowel syndrome that can also prevent some liver problems, and regulatory approval of Vyzulta, a glaucoma treatment. If both take off, bulls say, it could mean big gains in earnings before interest, taxes, depreciation and amortization (EBITDA), a measure often used on takeover candidates, that would double the stock’s price next year.
Management is also trying to unwind past mistakes, giving back the female libido drug Addyi to its previous owners to end a lawsuit and selling its Obagi skin care line for $190 million, after buying it four years ago for $344 million.
Bears Still Growling
The Obagi news illustrates the bear case for Valeant, which is that it bought a lot of companies at the top of a speculative fever that has now abated, and that it may not be able to get full value from those purchases.
When Valeant’s debt is added to its market cap of $5 billion, you have $8 billion in sales at a total cost of about $32 billion. Compare that with Merck & Co. Inc. (NYSE:MRK), with $40 billion in sales and $150 billion in market cap, plus $25 billion in debt, a total enterprise cost of $175 billion. No one argues that Merck is anything but well-run.
This is what I called the lesson of enterprise value last month and it’s still useful. You can say a company has good prospects for various products and units, but if you’re mostly buying debt, which must be repaid, then the price better be super-low. So long as Valeant’s value is mostly debt, it’s hard to see much hope for it.
The Bottom Line on Valeant
It’s speculators like the Vetr community that are upgrading Valeant stock. Most analysts remain on the fence, with just as many advising investors to sell it as buy it, and most not knowing what to think.
If you have ridden Valeant all the way down from the glory days of 2015, when this was a $250-per-share stock, it may be hard to persuade you to take $14 per share today and walk away. But that $14 can be doing other things, profitable things.
If on the other hand you got in at $11 per share, then you might look at $14 per share, read the bullish thesis and think, this could get to $20 per share, so let’s hang in. Buying the new Valeant, the chastened and modest Valeant, may score you some gains, but you’ll have to wait for them while the rest of the market passes you by.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
