- VRX missed on Q4 revenue, and the stock sold off by double digits.
- Revenue fell 10% Y/Y due to asset sales and LOE. Double-digit revenue declines could be hard to stomach going forward.
- VRX's credit metrics deteriorated compared to the year-earlier period. Were asset sales simply window dressing?
- Until management can deliver consistent revenue growth, VRX is a sell.
Valeant (VRX) reported Q4 earnings earlier this week. The company delivered revenue of $2.163 billion and adjusted net income of $347 million. Valeant missed on revenue by $20 million. I expected VRX to melt up like it has done over the past nine months. The stock fell over 11% on the revenue. Apparently, double-digit revenue declines were hard for VRX bulls to stomach.
Total revenue fell 10% Y/Y. Bausch & Lomb and Salix - Valeant's workhorses - saw revenue rise in the low single digits. However, revenue from Branded Rx (ex-Salix) was off 57% while revenue from U.S. Diversified fell 16%. Branded Rx (ex-Salix) was off due to lower volumes from the Ortho Dermatologics business, and the impact of divestitures, particularly from the sale of Dendreon. The decline at U.S. Diversified was due to a loss of exclusivity ("LOE") for a basket of products.
The problem Valeant now faces is two-fold. U.S. Diversified is the company's highest margin business. It has a segment EBITDA margin (excluding corporate allocations) of 70% vs. about 37% for other segments. The more it declines the more it hurts the company's margins. Secondly, financial engineering is great over the short term, but management still has to prove it can offset LOE from new product launches. Single-digit revenue growth from its two anchors might not achieve the task at hand. Of note is that Bausch & Lomb's segment EBITDA margin was 28%, down from 32% in the year earlier period. It implies that the segment could lose pricing power as it attempts to attain new business.
Corporate Cost Cuts
Valeant has done a yeoman's job of cutting corporate overhead costs. Management also has been able to forgo expensive R&D projects related to divested assets - this has represented a side benefit of asset sales. Corporate allocations declined 25% from $157 million in Q4 2016 to $117 million in Q4 2016. However, Q/Q allocations only fell by 7% while segment EBITDA was off 14%. Valeant may need to maintain its current corporate overhead to run its portfolio of businesses even while LOE kicks in and Bausch & Lomb's margins erode. This could be a drag on EBITDA.
Over the past year, Valeant reduced its debt load by $4.1 billion to $27.8 billion. VRX bulls have been energized that the company will survive. However, its debt/run-rate EBITDA deteriorated from 7.5x at Q4 2016 to 7.9x at Q4 2017. While debt fell by 14% Y/Y quarterly, EBITDA was off by 20%. Valeant remains highly leveraged, and it could draw the attention of the rating agencies. Debt maturities have been pushed out for a few years, yet a potential debt downgrade could create negative sentiment for the stock.
Double-digit revenue declines could be difficult to stomach going forward. VRX trades at nearly 10x run-rate EBITDA. Until the company can grow revenue and earnings, VRX remains a sell.
This article was written by
Analyst’s Disclosure: I am/we are short VRX.
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