After June, you won’t have Valeant Pharmaceuticals Intl Inc (NYSE:VRX) to kick around anymore.
The Canada-based drug company is changing its name on Jul. 1 to Bausch Health Corp. That, along with the new ticker symbol (BHC), is supposed to put the company’s past behind it once and for all, leading to growth and profit for investors.
Analysts are buying it. CEO Joseph Papa has fulfilled his promises to stop the rot, fix the balance sheet, and get the drug pipeline going again.
The stock is back past its January highs and has now doubled investors’ money over the last year. The only question is whether there’s more to come.
The Debt Remains for Valeant
Papa, who jumped from the CEO chair of Perrigo Company PLC (NYSE:PRGO), an over-the-counter drug maker, in 2016 after helping bring such name drugs as Diovan, Celebrex and Lotrel to the market early in his career, appears to have dealt with the debt.
But what he has mainly done is push out the debt into later years, making it affordable. The company had $416 million in interest expense during the first quarter, on long-term debt of $25.266 billion. Since last year, the debt load has fallen from $27.648 billion to its present level.
The old Valeant game was to buy up other drug companies with debt, cut the research, raise the prices, and bring the profits to Canada where the tax treatment was better. The Bausch game is going to be to feed the pipeline, focus on niches (like eye care) where it has leadership, and make money.
While the first quarter beat estimates, it was nothing to write home about. Revenue was $1.995 billion, beating an estimate of $1.949 billion. Valeant raised guidance for the full year to $8.15-8.35 billion in sales, a $50 million bump.
It took a huge loss, $2.69 billion or $7.68 per share, because it ended the litigation over its Philidor specialty pharmacy and antitrust allegations involving a drug called Solodyn. It was also cash flow positive.
The Rise of Bausch
At its Jun. 7 market cap of $8.23 billion, the stock is selling for about its annual sales. Most big drug companies sell for up to four times their annual sales. The fact that Valeant, or Bausch, is cash flow positive, with no outstanding legal issues in its future, has given it an attractive stock chart.
Some of the rise in the stock is due to new interest in the drug sector. The SPDR S&P Pharmaceuticals (ETF) (NYSEARCA:XPH) has spiked about 10% since the start of May. Investors are broadening their view, taking more risk, and looking again at sectors that hadn’t gotten their full measure of devotion, like drugs.
Analysts are beginning to compare Valeant, uh Bausch, with Mylan NV (NASDAQ:MYL), which also has a steady base of sales, a pipeline of new drugs, and a market cap of $20.6 billion on 2017 sales of $11.9 billion.
Based on those comparisons, Valeant looks like a bargain if it can stay on the straight and narrow. But the company has twice the debt load of companies like Mylan and will have to pay down that debt for years to come before you have a true comparison.
In the near term, no one sees the problem. When the market turns, however, that’s going to change. Speculators who enjoy the ride should know to get off when the averages reverse.
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 email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.