Short Valeant For Brodalumab?

| About: Valeant Pharmaceuticals (VRX)

Summary

Brodalumab's PDUFA date is on the 16th of February, and approval is likely.

The approval has probably been priced into the stock price. However, warning labels and other restrictions may come as a negative surprise.

Brodalumab's commericialization prospects are dismal, and AstraZeneca's onerous licensing terms will strain Valeant's liquidity.

Brodalumab is Valeant's (NYSE:VRX) psoriasis treatment, and its PDUFA action date is on February 16th. The approval of Brodalumab is a binary negative event for Valeant because of short-term and long-term concerns in the commercialization of the drug.

There is also strong possibility of an adverse market reaction to warning labels or other restrictions from the FDA with the approval.

Problem I: Good News is Baked in; Bad News is Not

Brodalumab's approval is almost certain, and this certainty is baked into the stock price. The drug got a unanimous 18 to 0 advisory board approval recommendation, and few in the market doubt the drug will be approved.

The only binary event for Feb 16th is warning labels. If the drug is approved with strong warning labels or heavy FDA restrictions, some of its priced-in value will erode. On the flip-side, if the drug is approved without warnings, expect massive upside. The latter possibility is unlikely because Valeant's CEO, himself, has warned the market about the possibility of warning labels due to a risk of suicidal ideation under the influence of the drug.

Problem II: Short-Term Strain on FCF

AstraZeneca (NYSE:AZN) initially developed Brodalumab but abandoned it after a suicide link. Afterward, the drug was licensed to Valeant for $100 million upfront and onerous milestone payments.

According to the agreement, Valeant will make an up-front payment to AstraZeneca of $100 million as well as additional pre-launch milestones of up to $170 million and further sales-related milestone payments of up to $175 million following launch. After approval, AstraZeneca and Valeant will share profits.

The sales-related milestone payments are unclear, but the $170 million pre-launch milestones will be a strain on Valeant's liquidity in the short-term. It will take a long time for Brodalumab sales to recoup the massive cash Valeant will be obligated to pay AstraZeneca, and to add insult to injury, Valeant will be forced to share profits.

Problem III: Long-Term Challenges to Commercialization

According to Global Data, Brodalumab - in the hands of AstraZeneca - was only expected to hit around $370 million globally by 2022. It is unclear if Global Data means peak sales or lifetime sales with this figure. Regardless, there are three reasons why this is horrible news for Valeant.

1. Out of the $370 million predicted, $243 million is from the U.S market. Valeant does not have rights to Japan and several other Asian countries because Kyowa Hakko Kirin Co. owns these rights. Valeant also does not seem to have the resources to push for commercialization in Europe.

2. The report didn't take into account the fact that Brodalumab may come with a black box warning. This information cuts the measly $243 U.S sales potential even further, perhaps to less than $100 million by 2022.

3. The report assumed the commercialization prowess of AstraZeneca, a $72 billion multinational firm with a sea of cash and some of the best talent and connections in the business. Valeant would be lucky to hit 50% of AstraZeneca's commercialization. In fact, Valeant may not even be able to commercialize the drug on its own.

Conclusion

There is still downside in Valeant stock, and Brodalumab's approval represents a binary negative catalyst on Feb 16th due to concerns about liquidity, commercialization, and FDA restrictions on the drug.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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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