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Valeant: Much More Upside Remains (Part II)

Warwick Simons profile picture
Warwick Simons


  • Valeant can comfortably meet debt repayments through to 2020.
  • At 2020, refinancing debt should be below 5x EBITDA, allowing Valeant to refinance on better terms than recent refinancing that was at 7x EBITDA.
  • FCF-Equity will be $1.1bn in 2017, growing to $2.5bn by 2021.
  • Valeant's share price should rise to $60+ by mid-2020 (3y from now).

In part I of this article, I showed how I expect Valeant (VRX) will deliver EBITDA within its 2017 guidance range and that its EBITDA will recover to ~$4.0bn by 2020 even after the Dendreon and iNova divestitures. In this part II, I explore the implications of this EBITDA growth for debt repayment and Valeant's share price trajectory. I also discuss potential events, such as a rumored debt-for-equity swap and a potential bid for the company.

Valeant much better placed after the refinancing

I believe that Valeant has conclusively shown its ability to service its debts during the past six months and that any projections of the company's impending bankruptcy have been proven to be false. First, there were the asset sales of CeraVe skincare, Dendreon, and other smaller assets that were announced in January. Second, the debt refinancing that was completed in March was very important, as it extended debt maturities and bought Valeant enough time to sell some assets and improve the profitability of its core business. Third, Valeant repaid $1.3bn of debt in Q1 17, and a further $1.0bn since then. Fourth, the core divisions for Valeant's future, Bausch & Lomb and Branded Rx, have begun to improve their performance as I discussed in the first article.

Of course, some of these developments have been reflected in the share price, which has doubled from the lows of $8.50. But I believe the share price still lags Valeant's underlying performance, and it still in part reflects the views of some parties that the company is not yet on the road to recovery. One of the stronger arguments that support this bearish view is that even though Valeant has paid off some of its debt, EBITDA has also dropped (in part from selling EBITDA-producing assets, and in part from the divisions VRX still owns) so that debt/EBITDA ratios remain

This article was written by

Warwick Simons profile picture
I'm a former hedge fund and Goldman Sachs' research analyst who worked on the buy & sell-sides for more than a decade. Before investing professionally I was a strategy consultant at Bain & Co. I left Goldman to invest my own capital and explore several independent ventures - one of which is to create content that helps others to invest their own capital.To that end, I've just started a marketplace service called Cogent Alpha. I own 15-20 stocks in my own portfolio, and with the service I explain what I own and why I own them. Here's my introduction video.I also run another website that contains many of my earlier articles, you can view that here.And then, outside of work...I'm from New Zealand and I've lived in many places, including Australia, the UK, the US and now Hong Kong. On the education front, I have an MBA from INSEAD and undergraduate degrees in Finance and Law from The University of Auckland.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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