Those who click on my profile and read my bio will read the phrase: "I use Seeking Alpha to correct myself not only through editors but also through commentators."
You see, I don't need to be right for the sake of being right, and Seeking Alpha provides a terrific opportunity to accurately assess certain situations. My last article on Valeant (NYSE:VRX) was quite humbling; it garnered over 500 comments. Most of them positive and some of them with some criticism.
So I've decided to highlight the most frequent and/or plausible criticisms so I can address them and provide context. The most frequent critique was the absence of a 2017 guidance estimate so that is what this article will mostly be focused on: providing a 2017 guidance estimate.
Criticism may not be agreeable, but it is necessary. It fulfils the same function as pain in the human body. It calls attention to an unhealthy state of things. —Winston Churchill
There were two comments that were the most frequent and/or plausible:
- Management already reaffirmed the 4Q16 guidance, so this is nonsensical, because they won't significantly deviate from the estimates after reaffirming their guidance. (frequent)
- 4Q16 doesn't matter, because it is all about FY2017. (frequent and plausible)
Comment 1 is a comment that can be refuted fairly quickly. The comment that got me thinking the most was comment 2. After all, what good would it be to be on the money on the 4Q16 earnings, only to realize that nobody cares about 4Q16. Everyone is focused on FY2017 guidance instead. I don't know if this is actually true, but it sounds plausible and as such, could drasticly impact my view on the upcoming earnings as well as my portfolio position.
"Q4 guidance was recently reaffirmed (meaning earnings will not deviate significantly, or at all, from the range management has already given)."
If this is indeed true it would render my work completely irrelevant. On the surface it seems like a decent argument, but upon further inspection it is a tad bit too shallow. As an example, Valeant reaffirmed their guidance when they reported their earnings in the second quarter of 2016. As most of us know, they ended up missing in 3Q16 and cutting their guidance. The result was a new low both in sentiment and in stock price. According to the above logic, this shouldn't have occurred, but people are sometimes wrong. Whether you are the CEO, CFO, Wall Street analyst or some writer on some website. Lastly, the argument also seems to imply that there is no reason to be critical of management and their guidance, since we can just trust them on their word anyway.
"However, as others have said above, the key thing is not the Q4 results, but rather 2017 guidance."
I specifically included the first part of that sentence. The word 'guidance' was used roughly 37 times excluding the number of times it was mentioned in my article. Of the guidance, the most important thing seems to be the EBITDA. The overall consensus is that investors must be met with the warm embrace of growth. So let's get to it.
The product sales adjustments
First off, getting any sort of decent estimate is a delicate process. This becomes even truer if there isn't enough information available and one is required to guesstimate. I believe this to be the case with Valeant. Instead of a product by product breakdown, I'll only be mentioning products that I think are in decline for clarity's sake. If a product is not mentioned, that means I have projected a flat growth rate for the product, regardless of whether I believe that to be the case. This means I'm not assuming any growth on any product, because, as you may know, I like being conservative.
The products that I believe require downward adjustments and why:
- First, we have the sold products: CerAve, AcneFree and Ambi with a combined annual sales of $168 million. The deal is expected to close in 1Q17.
- Another sold product was Provenge. Provenge generated $77 million in 3Q16 and the deal is expected to close in the second half of 2017.
- Oflaxacin is a drug that has lost its exclusivity and although that doesn't make the drug completely worthless, I'm going to pretend it does to appease the pessimistic among us.
- Nitrogress is a drug that has also lost its exclusivity. Again that doesn't make the drug completely worthless, but for the sake of argument we will pretend it does.
- Purevision declined by about 11%. Personally, I'm inclined to think that this relates to some troubles with Walgreens Boots Alliance, inc (NASDAQ:WBA), which should currently be resolved. Nonetheless I'm treating it like a trend and projecting further declines every quarter.
- Arestin sales cratered by 35%. The cause of this is unknown, but such a substantial decline doesn't look like mere distribution problems.
- Wellbutrin is a tricky one. The Wellbutrin sales fell off a cliff in 3Q16. The product sold 30% less than in the previous quarter. This might have something to do with the WBA troubles, but it might also mean the start of a trend. I am subscribing to the latter situation.
- Xenazine has shown sequential declines in every quarter since 3Q15. This to me definitely looks like a trend and I am treating it as such.
- Isuprel looks a bit like Xenazine in terms of sequentially declining so I am treating it accordingly.
- Xifaxan actually reported a decent sequential growth of 13% and, in my opinion doesn't really need a downward adjustment. However, a contributor accused Valeant of 'window dressing' the Xifaxin revenues to appease Takeda. For those who are not familiar with Takeda: Valeant was supposedly in talks to sell Salix (which includes Xifaxin). The contributor alleges (in the comments section) that the window dressing was done to generate a higher selling price. Of course, this claim is completely unsubstantiated and without fact. We'll go with it anyway to appease the skeptics.
I understand that this might be a confusing read, so I have created a table below with my revenue loss projections:
I estimate the total EBITDA loss at about $354 million annually or approximately $89 million a quarter. Now I want you to remember a couple of things:
- Brodalumab does not exist in this projection, because I have completely ignored it in spite of the fact that some analysts predict annual peak sales of $500 million.
- Every other product is projected with flat revenues, regardless of how reasonable this is. For example, Jublia reported a 42% sequential growth. Solodyn, Glumetza, Relistor, Syprine, Cuprimine all reported at least double digit sequential growth numbers.
- There are no additional drugs to market. The reality is that Valeant is expecting to launch 50+ new products in 2017 alone.
The only adjustments here I'm willing to agree with are the restructuring costs, the goodwill impairment and the share-based compensation. That leaves a quarterly EBITDA of $1,092 million. After correcting this for the quarterly EBITDA loss of $89 million explained above, we are left with $1,004 million in quarterly EBITDA or a full year 2017 guidance of $4 billion in EBITDA. Keep in mind that this is without growth in the current products and without including any of the 50+ products that Valeant is expected to market in 2017. Nor does this include 'blockbuster' Brodalumab.
Including the new products, the growth of the current products and Brodalumab might well put the EBITDA number on $4.15 billion. In other words, I'm estimating that these products might cumulatively add $358 million in annual revenue. This is less than some expect Brodalumab to bring in by itself.
Therefore I expect the company to guide between $4 and $4.15 billion EBITDA if some of my draconian assumptions prove to be true. If, as I expect, I was too harsh, the company could provide a higher guidance.
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.