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Summary

  • Valeant's CEO and Allergan's CEO are contradicting each other on Valeant's filler market share gain/loss. The Wall Street Journal's research backs Allergan's CEO.
  • Valeant debt's weighted average maturity is just 5 years and 4 months. Valeant's leverage is very aggressive compared to even utilities like Comcast and DirecTV.
  • Valeant's debt would be OK if it were a cable company. Cable companies are local monopolies when it comes to Internet access. But drug revenues can disappear suddenly.
  • If Valeant's market share falls like it appears for fillers, Valeant would have to issue a lot of equity to repay debt. Fillers were supposed to be what Valeant calls "durable, cash-pay".

What is the truth on fillers?

Fillers are products that remove skin wrinkles and restore volume if there has been volume loss due to aging. This makes users look younger. Companies which compete (or until recently competed) in this area are Allergan (NYSE:AGN), Valeant (NYSE:VRX) and Merz. Allergan is the market leader with its Juvederm family of fillers. Valeant just sold its filler products to Nestle a few weeks ago - Valeant's fillers were Perlane, Emervel, Sculptra and Restylane. Merz is a German company that makes Radiesse.

Intriguingly, Michael Pearson, the CEO of Valeant, claims that his fillers gained market share. At the same time, Allergan's CEO, David Pyott, says Valeant lost filler market share dramatically. Here are their respective quotes.

Michael Pearson from Valeant's Q1 earnings call transcript:

Our injectable sales, which would include Dysport and our fillers in the first quarter in the United States, grew 15%. I think I heard somewhere that it was cited the market grew at 11%. So I'm not familiar with that survey, but that would suggest we're gaining share, not losing shares. So we had very strong performance on the aesthetics side, continuous strong performance.

David Pyott from Allergan's May 12 event transcript:

So, a large part of this is we see pretty rapid effects of the cutting expenses. I think this is also the reason, probably, that Valeant didn't speak a lot about the performance of the products that came for Medicis because of course the Medicis acquisition is now on the order of 18 months back and the impact is now beginning to set in. You can interpret that from our analysis of the US filler market where I've rarely in my career seen such dramatic market share change in such a short time. Of course I'd like to think it's because we are so good but of course it does help where the other side is being dismantled at a rapid rate.

On the left side of slide 20 you will see that, even with the entrance of two new competitors into the US aesthetic neuromodulator market, we still hold 78% market share. On the right side, you will see that since Valeant acquired Medicis, we have rapidly accelerated our capture of market share.

David Pyott in Allergan's Q1 2014 earnings call transcript:

In terms of year-over-year market share changes, Allergan now enjoys over 44% market share in Q1, a year-over-year increase of almost 11 share points with Valeant at 34% down 7 share points and Merz at 20% down 4 share points. VOLUMA in March enjoyed over 13% share of the total market with low cannibalization of base JUVEDERM with most of the source of business appearing to be from Radiesse, Sculptra and to a lesser extent Perlane and Restylane

The only other information I could find on Valeant's and Allergan's fillers was in this Wall Street Journal article. The article's market share numbers match what Pyott presented in the Q1 earnings call:

Valeant's share of the $490 million antiwrinkle filler market in the U.S. had fallen to 30.3% by April from 43% during the quarter the company bought Medicis, according to market research by Guidepoint Global reviewed by The Wall Street Journal. Perlane's share of the market dropped to 9%, down from 14.4%.

Meanwhile, Allergan's market share rose to 46.2% from 33.8%, according to the Guidepoint data. Voluma notched a 13.8% share in April, in just its third quarter on sale.

Mr. Pearson disputed the scope of the Guidepoint data, and said Valeant's own figures show sales of injectables including the fillers grew 20% over the prior year. Valeant doesn't break out sales for particular products.

So, the Wall Street Journal article's data backs up Allergan's CEO. Is this why Valeant suddenly sold all its fillers to Nestle? Last week, we heard that Ryan Weldon, the chief of the businesses sold to Nestle, was leaving Valeant. That reminds me of something more. Ryan Weldon was one of three Company Group Chairmen appointed to take over Pearson's duties. Quoting Pearson from Valeant's 2012 shareholder letter:

Unlike most traditional pharmaceutical companies that organize centrally by function coupled with regional commercial operations, we created the role of Company Group Chairman, each of whom will have a set of distinct but disparate set of businesses and functions reporting to them. This new structure allows me to focus on helping to troubleshoot problem businesses and to focus on the larger business development opportunities around the world. We welcomed Laizer Kornwasser, Ryan Weldon and Jason Hanson to our executive team in these new roles, in addition to expanding the number of General Managers throughout our operations.

A little over a year after that shareholder letter was published, we find that two out of those three Company Group Chairmen have left Valeant (i.e. Jason Hanson and Ryan Weldon). Doesn't look good to me.

As for who is telling the truth on fillers, you be the judge. There must be someone out there who knows the truth. But I can only speculate. Remember that Valeant's organic growth in Q1 was 1% with the non-B&L products showing negative growth of -6%. If indeed fillers were growing at 20%, would one sell them?

Valeant's aggressive leverage habit

Valeant's debt maturity is unusually short. While other companies have been lengthening their maturities because they want to lock in record-low long-term interest rates, strangely Valeant has made no such move. Valeant lists its debt maturities in Note 8 (Page 19) in its latest 10-Q.

Using that table, I calculated Valeant's weighted average debt maturity as 5 years and 4 months. If we look at Valeant's debt load of $17.1 billion and 2014 adjusted OCF of $2.6 billion, we can see that Valeant will have to refinance to longer maturities (and therefore pay a higher interest rate, especially depending on the market conditions at the time of refinancing) or issue equity to repay debt and therefore dilute shareholders. As a reminder, Valeant's Debt/EBITDA = 4.6.

Not taking advantage of record-low junk-bond rates to extend maturities is being greedy. Does Valeant want to wait for a recession and junk-bond market blowup before attending to its debt?

Comparing Valeant's leverage to Comcast and DirecTV

Investors should look at slides 4-9 in Comcast's 2013 earnings presentation. Since today's Comcast (NASDAQ:CMCSA) (NASDAQ:CMCSK) is essentially TCI (Comcast bought TCI from AT&T), it gives an idea of the kind of business John Malone was running when he masterfully used leverage. Those six slides illustrate a very strong monopoly. There are no patented products going generic. There aren't any fillers losing market share.

Despite this, Comcast's Debt/EBITDA is just 2.2. This is less than half of Valeant. Comcast is one of the strongest monopolies one can think of.

DirecTV (NASDAQ:DTV) is the second-largest pay-TV provider after Comcast. One of DirecTV's largest individual shareholders is John Malone, who used to control it until he divested his super-voting shares as required by the FCC. DirecTV's projected 2014 EBITDA is $8.7 billion and its debt is $18.3 billion (Debt/EBITDA = 2.1). Using the table on Page 8 of its latest 10-Q, I calculated DirecTV's weighted average debt maturity as 10 years and 4 months. Thus, DirecTV's leverage is also far less aggressive than Valeant.

Comcast and DirecTV have modest leverage compared to Valeant, despite having much stronger businesses.

Conclusion

In order to defend Valeant's high leverage, its products have been claimed to be durable. The durability of Valeant's products seems to be questionable, given the above story on fillers. Valeant's organic growth is already fragile; its non-B&L revenue grew at -6% in Q1, with overall organic growth at 1%.

Equity investors should watch out for dilution or interest rate increases due to Valeant's massive debt with very short maturities. This is especially important for Allergan shareholders who are being offered 0.83 shares of Valeant for every Allergan share.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Who Is Telling The Truth On Fillers: Valeant's CEO Or Allergan's CEO? Is Valeant's Debt A Time-Bomb?