Valeant: Upcoming Earnings Report Looms Large

| About: Valeant Pharmaceuticals (VRX)

Summary

Has the new CEO fixed the Walgreens prescription issue regarding selling some scripts at a loss?

Will revenue match expectations?

Will the glaucoma drug get FDA approval in the next 90 days?

All eyes will be on Valeant Pharmaceuticals (NYSE:VRX) on Tuesday when the company reports 2nd quarter earnings.

Investors will be looking for answers to some important questions that are causing the stock to trade at default levels.

The reality of the moment is this: investors do not trust the company. It is going to take some excellent communication from the new CEO Joseph Papa on the current state of the company and some much needed answers to many looming questions.

  • How is the relationship changed with Walgreens (NASDAQ:WBA) in regard to money losing scripts?
  • When will the new glaucoma solution latanonoprostene bunod be approved? The company received a complete response letter from the FDA and I for one want to know what that letter has to say.
  • How much debt was repaid in the quarter?
  • What is the current free cash flow and how does that relate to possible covenant breaches?
  • Is the relistor drug for sale or is that a rumor?

These questions must be answered on Tuesday in a satisfactory manner or the stock is likely going back to retest the Brexit lows of $18.55 made on June 27th.

The IBB has been on a huge run retaking the 200 day moving average while Valeant is stuck below the 50 DMA.

A simple chart showing Valeant lagging the IBB.

Click to enlarge

Is it time to play catch up to the market?

If the answers to those 5 questions are handled properly and the company is performing then I believe the answer is yes.

Every investor wants to know one thing: has the stock bottomed? I believed that the bottom was in on the Brexit selloff and I put my money on the table. The relistor approval should have popped the stock $10 in my opinion but the market said NO, not yet.

The glaucoma complete letter of response caused a week long selloff from $25.12 to the $20.68 level and now the stock is set up to make a move up or down.

Here is a 6 month chart showing multiple shakeouts and the painful bottoming process.

Click to enlarge

As you can see this stock has been through hell. If the June 27th low turns out to be the true bottom then investors will realize that soon enough. I am holding a 50% position and will only buy more if the stock tests the $19 level on news that is not a disaster. Should the $18.55 level hold then in my opinion investors can expect a double at $37 in the next 90 days.

I have written several articles on Valeant and have made some timely trades and also taken it on the chin a few times since first buying into this nightmare stock at the $26 level.

What has changed?

  • The company is no longer in default.
  • New CEO Joseph Papa takes over with excellent reputation.
  • Bill Ackman along with other top notch professionals join the board of directors.
  • Timely filing of quarterly reports on track.
  • New drugs approved by FDA.

I am still long the stock and have been trading around the position. It is my firm belief that this company will trade at the $50 to $65 level at some point in the next 24 months. The question is will it hit $15 first?

At this level there is risk both to the upside and the downside, and some people may want to sit the earnings report out on the sidelines. That may not be a bad idea, as the stock could move 15% to 30% in the next week or two in either direction, and it doesn't have to make any sense.

Clarity is what the market is looking for and as of late there has been very little of it. Papa has a real opportunity here to show his leadership and instill confidence for current and new shareholders.

I continue to believe in the new management and board of directors and firmly believe that the worst is behind for the stock. However there may be one more final shakeout before a long term sustained rally.

Conclusion

Valeant is down 91% from its all time high reached one year ago on August 6th, 2015. New management and new drugs in the pipeline show the strong possibility of a sustainable turnaround for the company.

Management must fix the issue with Walgreens' money losing scripts.

Salix sales must increase and the company must continue to pay down debt and cut expenses to increase cash flow. The company is trading well below its peers and I see a triple in 24 months from Friday's close.

Do your own due diligence and trust very little of what you read as there is a lot of misinformation out there from people gaming their positions. I advise investors to take the time to read the quarterly reports and stay off margin. As always, know your exit point before entering any trade.

Disclosure: I am/we are long VRX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.