Valeant: Who Can Stomach Double-Digit Revenue Declines?
Summary
- 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.
Credit Quality
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.
Conclusion
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.
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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Comments (94)
- That tactic will only get you "hosed" in this secular bull market, pal.
- It's a total "loser", plus; you can't extract the "hedging" out of "hedge fund", eh?!;-)
few things:
- can somebody else post a more positive/intelligent article so we don't have to post here.
- I have Charles Schwab, every time I trade VRX I see their rating which is A as of last week. Charles Schwab doesn't give A rating very easily.
- Most analyst, even the negative ones have a price target of $18 to $25. (some even higher)
- I made very good money on VRX last year from the mid teen's all the way to upper 22's. But, I started taking large position to get back in last week from upper 18's before the report to low 16's to lower cost average & more today in 15 range. I have lost all my gains which took me a year to accumulate & then more. I like to keep holding on since I believe in this company, but frankly I don't think I can much longer. At this point I think I'm too heavily invested every $1 down costs me over $50,000. So some word of encouragements from you longs if you have any, don't want to hear from you shorts, I have heard it all from you guys in past year. unfortunately the market seems very negative & likely to be opening down with even bigger losses than yesterday. so, I don't see how possibly Valeant can do any kind of rebound or stay positive or even stay same level (I'll be happy with that). so most likely I will bail out today & try to Live Another Day
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