Valeant - $94 Price Target

| About: Valeant Pharmaceuticals (VRX)


Valeant needs to sell Salix, even for less than it wants to if needed. The deal is too good to pass up.

Debt is the primary problem with Valeant. As soon as the debt is reduced by a Salix sale, the price of the stock will shoot up.

My price target looks excessive, but it's only an objective reflection of what the numbers say when comparing Valeant to other companies.

Valeant's (NYSE:VRX) stock price has taken a nosedive because of bad news in its talks with Takeda Pharmaceuticals (OTCPK:TKPYY) to sell Salix, the gastrointestinal unit it acquired for $11 billion. However, the Salix deal offers Valeant an opportunity that is simply too good to pass up, even if they have to sell Salix for lower than they would like.

My ballpark value for Valeant is much higher than the last one. That's because I'm using a different calculation and accounting for $7 billion in additional debt repayment that I did not account for in the previous calculation. This price target is an illustration of Valeant's potential, not a prediction of where the stock price will be at any particular date.

The Salix Deal Is Important

Valeant has $30 billion in long-term debt. This, along with weakness in the firm's assets, gives the stock a very low valuation compared to its EBITDA. Valeant's management recognizes that the debt is the biggest problem the company is currently facing, so it is willing to lower revenue in the short term by selling assets to pay down the debt.

Selling assets will reduce revenue, but it is worth it because the sales would lessen the risk for the company and improve the stock price. Many were surprised to hear that Valeant wants to sell its prized gastro business because Salix holds Xifaxin, the company's best-selling drug, and several other hits. However, when you look closely at the deal, it appears excellent.

Salix only generates 15% of Valeant's revenue, but if it was sold for $10 billion it would reduce the debt by 33%. Such an instant consolidation of the business would send shares through the roof. My theoretical post-Salix Valeant would be looking at revenue of around $10 billion and $10 billion in debt by 2018.

Revenue in Billions of USD:

9.5 (2016 guidance) - 1.5 (Salix Sale) + 2 (Organic growth, pipeline and price increases over two years) = 10

Debt in Billions of USD:

30 (2016 long-term debt) - 10 (Salix sale) -7 (debt payments due - interest + non obligational debt repayment from 2017-2018*) = 10

Comparison With Teva Pharmaceuticals (NYSE:TEVA)

Dividing the market cap by EBITDA:

Rough 2016 Data
EBITDA Debt Market Cap Multiple
TEVA 4.5B 10B 37B 8.3x
VRX 4B 30B 5.3B 1.3x

In 2018, when Valeant's debt has gone from 30 billion to 10 billion, it will have the same amount of debt as Teva. I think Valeant deserves the same market cap to EBITDA as Teva of 8.3x, but we can use a more conservative 5x.

Market Cap is 5x EBITDA

5 x 4 billion = 20 billion market cap / 350 million shares = 57 dollars per share

Market Cap is 8.3x EBITA

8.3 x 4 billion = 33 billion market cap / 350 million shares = 94 dollars per share


Valeant is clearly undervalued. The market is pessimistic because of the company's huge debt load, but once this debt is reduced via strategic assets sales the stock will rapidly increase is value. Even conservative calculations result in massive upside potential for Valeant.

It may seem crazy to hear that Valeant could potentially be worth almost $100 in a few years; however, if someone told you the stock would be worth $15 when it was worth $200, you would have thought they were crazy too. Valeant needs to undo the damage it did with its disastrous acquisition of Salix before it can return to its old value.

I'm just giving you the numbers as objectively as possible; investors should make their own conclusions from the available data.

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.

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