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Valeant: Why Guidance Was $200 Million Below My Expectations, And What To Do About It

Warwick Simons profile picture
Warwick Simons


  • Valeant guided to 2018 EBITDA of $3.05-$3.20bn, $200mn below my expectation of $3.4bn.
  • $200mn shortfall is due to higher LOEs and projected FX losses.
  • Valeant shares remain cheap even on the lower projections, but potential upside is lower.

Valeant (VRX) released their 2017 earnings statement and 2018 EBITDA guidance on Feb. 28th. Their 2017 results were strong, with EBITDA of $3.64bn is in the middle of their guided range of $3.60-3.75bn. This result was especially impressive as they met their guidance given in February 2017 despite selling several assets through the course of the year.

Valeant's guidance for 2018 EBITDA was however much lower than I had expected. CFO Paul Herendeen guided to EBITDA of $3.05-3.20bn, as shown in the charts below.

I had expected $3.4bn, as I wrote in this article that I published in October. In that article I raised the possibility that CFO Paul Herendeen, who is fond of saying that he views "guidance as a commitment," may guide to a lower number of $3.3bn to err on the side of conservatism.


But the current guidance, with a midpoint value of $3.1bn, is materially lower than my forecast, and this difference cannot be put down to CFO Herendeen's conservatism. The main difference is that the projected headwinds from LOEs are c. $200mn higher than I had expected. The EBITDA from the 2017 cohort of LOEs is expected to be $287mn lower than in 2017, while I had a $210mn headwind. The big difference arose in the 2018 cohort of LOEs however. Their EBITDA is expected to be $113mn lower than in 2017, whereas I had no "2018 cohort" of LOEs.

In my forecast I projected that the B&L & Salix businesses would grow at 5% and 9% respectively, based on the guidance given by Valeant management in the table below from page 14 of the same Q4 2016 earnings presentation in which their LOE forecasts were first introduced.

My growth projection was at the headline level, as the table implies, and I did not have a separate

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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. 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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Comments (168)

Just search Vyzulta on Youtube.. the press is incredible. Game changer drug. I expect a billion in sales from it in 2019
Derek Teed profile picture
If you expect a billion in 2019 you will be disappointed.
The agreement between Nicox and VRX provides some hints about the revenue expectations concerning Vyzulta.


"In addition, the potential milestones payable to Nicox by Bausch + Lomb have been increased by $20 million, added to and split between 3 existing milestones at increasing annual Net Sales levels. The first additional amount payable will be added to the milestone on achievement of $300 million annual Net Sales and the last additional amount payable will be added to the milestone on achievement of $700 million annual Net Sales. The total potential milestones due to Nicox have therefore been increased from $145 million to $165 million"

However, revenues will take years to reach these levels.
What do you think about the recent awards of additional (?) performance based RSU's for the management?
This all comes down to revenue growth. I think the decline in revenue growth has been more than priced in. The closer we get to the quarter when revenue on an absolute YoY basis returns the stock price will increase and rapidly. Some LT people like myself are in and sitting on LT Capital gains when that happens, other traders will be in and out and try to time it. Given the discrepancy in LT vs ST tax rates I can be patient. Nice to see upgrades coming as well as the lower PTs being lifted. While there may be some disagreement on where the turnaround is among the analyst community, the end of days scenario seems to be off the table. I’m sure potential acquirers have come to that same conclusion and pieces of this business look excessively cheap to them especially at the high levels their stocks are trading at. JNJ and 16x at 16x 2018 earnings. AGN is at 9.6x. They could use their stock and make highly accretive purchases of parts of VRX business is its share price doesn’t recover as debt gets paid down. That is without synergies.
WolfWalkerStark profile picture
So what the heck will Salix do this year, growing or not growing?
Warwick Simons profile picture
I think they're unlikely to sell Salix soon because if a sale was in the works they would not have classified Apriso & Uceris as LOEs.

The move to classify them as such is a long term move to take the pain now with a view to building a better pattern of growth through 2020.

If they were selling Salix they would not have classified them as LOEs and they would have argued to prospective bidders that the IP is rock solid so there is no need to treat them as LOEs (and the buyer should pay up for them).
Good point
If a competitor comes to the table with an offer they can't refuse - $12bln + they will have to consider it.

Under $12bln and the debt ebitda ratio doesn't move much.. but 12+ gets us under 6 debt/ebitda
Warwick - what are the chances takeda or another player comes back with an offer of $40+ for the whole company. I know Joe doesn't get paid out big time until $60+ but he'd be doing his shareholders a disservice to not consider an offer more than double the current SP. Valeant can be worth a whole lot more under JNJ or AGN or PFE.. lower debt costs, cost synergies, higher mulitples, etc.
Han_Solo profile picture
Dear Valeant - Please change your name to B&L now that all major legal concerns are resolved and sell Salix for $15B. Thank you.
B166ER profile picture
I think they'll announce a name changes in Q3, would be my guess..

Not sure if they would need to sell Salix. Not quite yet. Let it grow a little more.
I couldn't post on one of my old comments so I'm doing this for ME. =P
Comments (728) |+ Follow
17.75 new low then from 18-24 last 15 min of 11/1/16 off Salix sale rumors. VRX 19.18 weekend before elections...
06 Nov 2016, 07:44 PM
Bumping for future reference of where we were and what's happened since...
3/4/2018 Since those days 16 months ago VRX made a new 52 week low of 8.31 and a new 52 week high of 24.43 currently trading at 14.88 after ER Q4 and weak 3.05-3.20 2018 guidence.
So when a stock goes from 12 to 24 on no news that's all good and fine, but when it drops from 18.50 to 14.80 on bad ER & guidance it's all 'manipulation'. Now I get it, it's only manipulation when a stock you are holding long and very emotional about falls on bad news. Interesting.
The fact that it went up from the previous high of $18.25 to $24.41 down again to the $18 range for most of February, then after results down to the recent low of $14.44 is sufficient indication that this stock being manipulated both on the up and down and the investors trading on margin are the biggest losers.
Warwick Simons profile picture
A question for the bears, including 33722435, Mr foodie and cashawash: what is VRX worth in your mind? Is it a 0? I get $2.5bn of unlevered free cash flow in 2018 and $1.0bn of levered free cash flow. What is this worth to you?

I agree VRX isn't a brilliant company and that it has many challenges. But the stock price reflects that, so what do you think it is worth?
@Warwick Simons

"I get $2.5bn of unlevered free cash flow in 2018 and $1.0bn of levered free cash flow. What is this worth to you?"

I wouldn't be so generous to omit restructuring charges & contingent consideration ($390m). Stock-based comp, while being a non-cash item are a cost of doing business, another $80m. I feel ok with leaving that out though, because most of the stock options and RSU will likely expire worthless unless VRX hits 60$ a share.

Apart from that, the estimate for 2018 apparently includes only half of the expected Apriso and Uceris LOE. The other half will be a headwind to 2019 EBITDA.

I get your point and agree, but at the same time I understand why people don't feel that comfortable with VRX any more. VRX is now essentially a bet on restructuring charges and management delivering on bullish growth predictions while keeping LOE's in check. The latter has been called into question lately.
"A question for the bears, including 33722435, Mr foodie and cashawash: what is VRX worth in your mind?"

Fair question... it is not what I think it's worth or any else for that matter, it is what the market says it is worth and that is as of close on Friday exactly 14.88/share or 5.182 billion. At that price there are willing sellers and buyers, and they dictate what VRX is worth.
Derek Teed profile picture

"Fair question... it is not what I think it's worth or any else for that matter"

That is total bs. The perceived fair value is fundamental to everything we are discussing. I highly doubt you believe in the efficient market theory, so don't coy and bs with us after all your commentary so far. Not to say I don't appreciate the bearish commentary, because I do. But quit beating around the bush on the most fundamental question.
sditulli profile picture
Bankruptcy isn’t on the table right now....current guidance just implies slower paydown schedule but I think guidance can be beat
I am long vrx but I disagree. Bankruptcy is on the table until they stop showing negative growth yoy. This thing is going to take time unfortunately.
sditulli profile picture
14 should hold on valeant
When Vrx reports Q1 in early May/18 with a beat and we will see $25 or more. So hold on for another 9 weeks and buy all you can but make sure you don't have margin call at $12 as these guys on Wall Street are calculated gamblers and they want to see how low the price will go. Don't forget they have billions to gamble.
Operating FCF in Q4 is $578mm
I think if takeda came back now and offered $40 mgmt would take it. Takeda can now take the company for less and with $6bln less debt. I think the shelf is because salix is about to be sold for $10-$12 and they want to sell stock when it spikes to $30 on the news to then make a transformative acquisition
Derek Teed profile picture
I think that is wishful thinking. How do we know Takeda would still offer just $10bn for Salix? Salix growth has stagnated to single digits.
kingRIG2.0 profile picture
Takeda feels Salix would be in better hands with them, they felt it would easily fit in their portfolio within their already existing salesforce so imagine the additional profit potential for Takeda, just saying
When they approached valeant, valeant was in much worse shape and so was salix. Salix was actually declining. Salix is doing much much better now than in 2016
Derek Teed profile picture

Debt/ebitda will be above 6 for almost 4 years under the midpoint of guidance. That is simply dangerous, imo. If Valeant was in as much trouble as some here infer, then would the CEO be able to get $10bn or more for Salix from Takeda or others?

Do you think Takeda and TPG would still be interested in a complete takeover after getting rebuffed by Valeant in the Spring of 2016?

What are you thought this. Thanks
Warwick Simons profile picture
I think a full takeover is more likely than selling off a division. The firm is just so cheap on a cash flow basis and many of the industry bidders are flush with cash. There are many synergies by bolting VRX onto existing franchises, and maybe selling off a division or two after that.
Now that many of the lawsuits have been settled and VRX has shown a path to growth then we may start to see some bids coming in.
Given EBITDA is now below $3.5bn I think management are more likely to accept a bid in the $30-40 range than before. Joe Papa would miss much of his big payday but most shareholders would accept, I suspect.
Oliver Hahn profile picture
Given the hurdle for Papa at $60/share, I don't expect any offers to "see the light of day" unless it values VRX north of $60. So in my opinion, VRX still has a couple years to go to pay down debt and get back to organic growth.
Derek Teed profile picture
It seems to me the board of directors and the shareholders(proxy fight) get to decide to accept the $30-$40 bid. So it does not matter what the CEO thinks if he cannot sway the board to his opinion anymore.

The problem is that Valeant seems to always have "organic" growth. The other problems are the "low" growth, LOEs, 6 debt/ebitda for almost 4 years, and the associated risk that comes with it. I think that $60 is now long gone.
The article does not address the central problem. Unlike larger traditional pharmaceutical companies VRX assumed it could buy growth, often in the form of older products whose prices could then be raised dramatically, rather than developing products internally. That game is over. Good new acquisitions are expensive and competitive and the old acquisition strategy became a scandal.

So while over any given year we can argue about about EBITDA moving 5% either way , in a dynamic field it is inevitable that VRX' portfolio will be subject to episodic new competition which will take market share and erode pricing.

Meanwhile , VRX is a CCC+ credit with debt to EBITDA of 7-8x in a dynamic industry. The equity is so highly levered that a 50% change either way moves the EV/EBITDA by less than 1x , so in the short run the stock could be a hot craps table ; but it is hard to see how this ends well several years down the road, especially if we are in a rising interest rate cycle.
55 percent of their business is durable goods. You’re thesis is wrong
Assuming your 55% is the same proportion of EBITDA , that would put debt at at 12-15x "durable" ( I think you mean "stable") EBITDA. That is not a sustainable capital structure long term and what you call "durable" also has to be defended periodically, in parts , against a variety of competitive and often unpredictable developments. Perhaps they will be lucky or a wildly high strategic bidder will emerge to allow them to de-leverage ; but the odds on that bet are not good.

Also , "your" not "you're" would be the correct usage in your post. I hope your financial analytical talents are better than your grammar skills ; but I fear not.
ValueInvestor45 profile picture
I hope you are right!
The next 6 weeks will be between $13 to $17, then back to $20 two weeks before earnings. If you're short term trader then do a covered straddle and if you've more than 3 months horizon then keep on buying and make sure you have money to buy at $13 or $12. Hedge funds are playing poker game with VRX stock. Papa setup to beat every quarters in 2018. I am converting some of my fixed income into VRX. You will be rewarded up to 100% sometimes in May. Do your due diligence before you buy VRX.
Vrx filed an S3 yesterday and my guess is they will use the proceed to payback series F term loan and removing all restrictions on using their $2 billion FCF per year to buyback shares later this year. Once term loan is gone, management will be in control of the stock price.
cemanuel profile picture
Valeant would be foolish to begin a buyback program now. Their forecast has them very close to a 8:1 debt to ebitda ratio. Moody's has highlighted this as a key measure and quoted it last November when they gave their latest ratings report. So far Moody's is saying they'll be patient and expect better 2019 numbers but for that to happen either debt needs to be reduced or growth needs to take place.

Quote from Moody's, November 8, 2017, "The rating outlook is stable, reflecting Moody's expectation that Bausch + Lomb/International and Salix will continue to grow and that Valeant will use free cash flow to reduce debt."

Spare cash needs to go to one or both of the following - pay down debt and fuel growth - with emphasis on the former.

With the company's current situation, buying back shares would not just be foolish, it would be irresponsible.
How's it foolish?

B&L generates a steady EBITA or cash cow of $1.44B per year
Cooper with EBITA of $429mm cash cow value at $11.5B or 27 times EBITA and B&L should be valued at minimum 21 times or $30B

Branded RX $1.36B EBITA should be value 12 to 15 or between $16B to $20B

US Diversified $997mm EBITA (2017) value at conservative $2B

=$30B + $16B + $2B = $48B - $25B (debt) = $23/350 = $65.

I fully support shares buyback under $20 as long as EBITA is over $3.4B. Don't forget Papa bought shares at $24 when he joined the company.

The reason why Mr. Market gives Cooper 27 times valuation is because their $429mm EBITA is coming from a cash cow business and most people don't know B&L is a cash cow business.
cemanuel profile picture
"How's it foolish?"

I wrote why it's foolish in my comment. Companies with a junk credit rating due to debt, an 8:1 debt to ebitda rating and substandard R&D/pipeline which will limit growth should concentrate on reducing debt and working to grow the company so it's financially stable.

If they announced a share buyback program I would sell shares immediately, without further thought, as it would indicate managerial incompetence.
VRX management issued conservative guidance which it will likely beat every quarter in 2018. Papa's conservative approach to annual guidance has worked to pull VRX previously out of its historical lows in 2017. In 2018 we should see a new resistance found at 14 to 16 per share in the short term. And push the stock forward to over 20+ FTM resistance.
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