Intangibles Hold the Key to Valeant Pharmaceuticals Intl Inc Stock

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Valeant stock - Intangibles Hold the Key to Valeant Pharmaceuticals Intl Inc Stock

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock plunged Wednesday after the company reported earnings and issued lower guidance. As new CEO Joseph C. Papa attempts to engineer a turnaround for the Canadian drug company, Valeant stock has lost nearly one-third of its value over the last six weeks.

So far, the Valeant’s restructuring has been painful. I do believe, however, that the company is taking the steps necessary to become a prosperous company.

VRX Beat on Earnings but Issued Lower Guidance

For fourth quarter 2017, Valeant reported revenue of $2.16 billion. This missed estimates by $20 million and represents a 10% year-over-year decline. Adjusted earnings came in at 98 cents per share, one cent ahead of the expected 97 cents per share. Earnings in Q4 2016 were $1.26 per share.

For the entire year, the company earned $6.83 per share, well ahead of the expected $3.85. The company credited U.S. tax overhaul for the much higher earnings.

2017 revenues, reported at $8.72 billion, came in just short of the expected $8.75 billion.

2018 guidance is likely responsible for most of the disappointment.

Valeant expects projected revenue to fall to levels last seen in 2014. They see 2018 revenues coming in between $8.1-$8.3 billion. Analysts had expected $8.38 billion. While that level may not preclude long-term growth, but it does signify a turnaround that’s moving slower than many had hoped. Still, the company expects sales to increase again in 2018. By 2021, VRX expects a third of its revenues to come from new products.

Intangibles Hold the Key to Valeant Stock

Despite the narrative of disappointment, some progress has occurred in Papa’s tenure. Debt levels hit $30.2 billion at the end of 2016. But asset sales have lowered debt levels to $25.7 billion just one year later.

However, with a market cap of $5.7 billion, a $25.7 billion debt burden is still overwhelming. Debt remains the reason drug stock investors often prefer the likes of Gilead Sciences, Inc. (NASDAQ:GILD), Merck & Co., Inc. (NYSE:MRK), and Pfizer Inc. (NYSE:PFE) to VRX.

However, those peers also come with higher price-to-earnings (PE) ratios. With a stock trading at just over $16.50 per share and earnings of $6.83, the PE ratio comes in at under three times earnings. With the one-time effects of the tax credit removed, the valuation rises to about five times earnings.

Still, the stock fell over 10% following the release of the earnings report. So, investors remain wary of Valeant’s turnaround plan.

As I mentioned in a previous article, intangibles hold the key to saving Valeant stock. As of the last quarter, VRX held $16 billion worth of intangibles on its balance sheet. This figure is down $4 billion from the same quarter a year prior.

This reduction is because Valeant is working to make some of these intangibles tangible.

Papa believes seven new drugs will bring in more than $1 billion over the next five years. Among these drugs is Siliq, a lower-cost treatment plaque psoriasis. Ultra — contact lenses with MoistureSeal technology — also shows some potential.

Assuming these drugs are successful, they could catalyze a new and improved VRX in future years.

VRX also raised the price of some drugs by 9% in January, which should provide additional help in improving revenues.

The Bottom Line For Valeant Stock

Valeant is continuing to take the steps necessary to return the company to solvency and prosperity — slowly.

Wall Street found the revenue and earnings outlooks disappointing. However, the company continues reducing debt and works to turn its intangibles into revenue sources.

Investors now are betting the intangibles will grow into profitable sources of revenue. If and when the company can build a revenue base on new product offerings, Valeant stock will once again bring gains to investors.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/intangibles-hold-key-valeant-stock/.

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