The start of 2016 will surely be remembered at Valeant (NYSE:VRX). Its CEO caught pneumonia and was replaced by an interim CEO. An investigation into their use of Philidor was finalized leading to terminations, a delayed 10-K filing causing debt default notices and restatements. Bill Ackman's Pershing Square got two seats to Valeant's BOD. With the return of the sick CEO, arguably too soon, guidance was reduced during a disastrous Q1 earnings call causing the stock price to plummet.
The CEO decided to leave and a new CEO from Perrigo (NASDAQ:PRGO) brought in. Guidance was reduced again when suddenly the new channel deal to replace Philidor, Walgreens (NASDAQ:WBA), wasn't working as intended. Board member turnover ensued. A new Controller was hired. One drug was approved, one recommended for approval and one approval delayed caused by concerns related to a B&L manufacturing plant inspection.
I see light at the end of the tunnel though. The company is executing and delivering on their promises. Default has been averted. The cash flow is still strong. New management is in place. Management is executing against its Stabilization Plan (slide 16). New drug approval activity is keeping everyone busy with 20 new product launches in 2016 (slide 18). The bonds are holding their value. The Q2 earnings call is scheduled for Aug. 9. We'll hear more then how the rest of the year is looking. To me, it seems only a matter of time before the share price starts to recover.
Sure, there are concerns with Valeant's $32B in debt. Seems like a lot of money. What most seem to forget is that about half of that was acquired about a year ago for the Salix Acquisition. Most observers and savvy investors liked that acquisition, at the time. Specific terms in regard to interest payments and mandatory amortization payments were communicated and agreed to. Not sure why but Valeant seemed to have also agreed to repay more than what they promised in their debt agreements.
With that said, the rating agencies all agree that Valeant's financial performance would have to deteriorate significantly for any re-org to be necessary. I believe Valeant's strong cash flow from their diversified product offering can service their debt. In fact, giving me confidence, even during their "Lost Quarter," Valeant was able to produce $558.1MM in cash flow from operations after interest payments. And yes, that included a $110MM price appreciation credit true-up (Page 55). It was a "lost quarter" or a "stub" quarter. Give Valeant a break.
Of course, many are saying that Valeant has to sell assets to survive. Some are even saying that they can't sell assets and survive. I'm of the opinion that the only assets they should be selling are the orphan drugs that got them in some of the price increase trouble to begin with. If management continues to stabilize the company and keep the cash coming in, the debt will be paid down in due course. Interest rates are expected to be low for quite some time. As Valeant's balance sheet improves over time, they'll likely have no issue refinancing, if needed, and should be able to bring down their borrowing costs.
In terms of valuation, I think it's fair to compare Valeant's valuation to that of their competitors such as Allergan, Impax Labs, Perrigo, J&J, Mylan and Pfizer. Some suggest that Valeant has no competitors but from a valuation basis, I believe they do as the industry basically uses the same formula for Adj. EPS. Certainly, Allergan and Impax Labs do, basically. So what does the comparison look like?
I'll let you make your own call. Seems like a revaluation is in order to me and Valeant deserves a break. They have been working tirelessly to stabilize the company, keeping their promises and positioning the company for the future. If Valeant continues to execute, a revalue of the shares higher seems likely and sizable gains could be achieved for investors.
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.