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Valeant: Valuation Revisited

Milkweed profile picture


  • This article is a follow up to a recent article looking at the valuation of Valeant (VRX).
  • In addition to correcting a mistake that was pointed out in the comments to my previous article, I incorporate new guidance from management.
  • Commentary about negative market reaction to the 2017 earnings release seems focused on near term issues; however, their mid term projections appear to have been significantly reduced as well.

In my previous article published in November of 2017 I covered a lot of territory; however, the basic point of the article was to look at the valuation of Valeant (VRX) using managements projections at the end of 2016; for the years 2017 to 2020.

At that point 2016 was the base year and I created a pro forma to extrapolate Valeant's financials out to 2020 using the growth rates management was projecting at the end of 2016. In my articles I always provide the caveat that I have no formal financial training and it's possible I could make mistakes and in the comments section of my previous article a significant mistake was pointed out. I accounted for debt based on my (parochial) understanding at the time that it represents principal only. I found out that in the business world interest is included in what is called debt and I had double counted the effects of net debt in my valuation at that time. For most businesses this would not be a significant issue and might even be a decent margin of safety factor. It's a huge drag on the valuation of a highly leveraged company like Valeant.

In the following revised pro forma 2016 to 2020 I fixed the double counting of debt issue and I also eliminated financials for the year 2017 for clarity as the 2020 end point is merely an extrapolation of 2016 (adjusted for divestitures) using managements 2017 to 2020 growth projections (provided at the end of 2016).

In my previous article I went into detail as to how I extrapolated from 2016 to 2020. In short I used "Segment Financials" provided in an SEC filing and I adjusted 2016 to account for divestitures. I then extrapolated to 2020 using the growth rates projected at the end of 2016. One

This article was written by

Milkweed profile picture
I'm a self employed architect and self taught fundamental investor. You can also catch me on TMF CAPS competition player "MKArch". http://caps.fool.com/player/mkarch.aspx

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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Comments (147)

r2sj profile picture
14 Mar. 2018
I really appreciate your DCF analysis. I don't think EBITA is a good indicator in evaluating the value of VRX.
Thought I post this here because it relates to David Maris and the old Valeant, Biovail. Kind of funny that a pharma would blame an earning miss on a truck crash at the very end of the quarter, and you thought you seen everything.

kingRIG2.0 profile picture
Are you talking about the old management? Old News
Just an anecdote... I believe Maris is overly bearish, but putting the long history between him and Valeant in context you can see where he is coming from, just like bulls can get very emotional I think Maris may have a bit of an axe to grind here.

Nice rally past 2 days... congrats to Dimitri and all the bulls... volume is not convincing however, will be looking for a short entry this week. But another rally tomorrow I may play a long swing trade, but volume needs to be much higher.
Check out the amount of $19 call options expiring Friday.
When VRX report Q1 earnings sometime in early May (8 or 9?) and beat earnings (Probabiiity is 98% since they low ball guidance last week), stock price will make new high and my guess is $28 to $35. Only 8 weeks before earnings and you still have plenty of time to buy back before earnings.
I'm just looking at the charts, not youtube, the news, or any other noise. So far, so good.
Then you are a trader like me, not a long term investor.
For Dimitri & RickIn Miami and all other longs,

If you guys are wondering about current sales for Vyzulta & Siliq combined, here is the estimate.

From the presentation slides we know that currently the run rate is less than 100 million/year for the 'significant seven' (again very suspect why they just don't give the exact numbers, it's always 'relative' to something, a 'percentage', 'less than').

Significant seven includes 4 products that are currently generating revenue, Relistor, Siliq, Vyzulta, and 1 B&L product. We know that Relistor revenues were approxiamtely 62-63 million in '17 (from Progenics financials to whom Valeant pays a royalty on sales of Relistor to). If we take the current run rate to be 90 million (since management will not provide exact numbers this seems reasonable) that leaves about 28 million for the other 3.

Now I have no clue on the market for contact lenses, and since Valeant does not break down revenue by product, I'll just assume 5-10 million/year run rate for the B&L product (any one care to provide some input). That leaves on the low end 17 million and high end 23 million annual run rate for both Vyzulta and Siliq combined.

It is not what you see in Youtube videos, or 10% or whatever greater efficacy, or how much Vyzulta or Siliq is talked about in the media, or how many derms sign up for Siliq.... what determines how much revenue a drug will generate is solely dependant on it's placement in the formulary & how restrictive the pa's are if the drug has one. Siliq is excluded from most and has very restrictive pa's, Vyzulta is either non-formulary or Tier 4 (it needs to be Tier 3 to generate sales). Knowing this and doing proper research on formularies (every major 3rd party payer has their own) takes the guessing game out of how well a newly launched drug will do in the market place.

One more thing, the biggest of the significant seven Relistor, is in trouble. All you have to do is turn on the news and see what is going on nationwide with opioid epidemic and what is being done about it to know. My guess is Relistor scripts will trend down in lock step along with opioids.

Now that significant seven seems not so 'significant'. You'll have to make your own judgement based on facts and realities and not based on any emotional ties to a stock.

Once again, your attached comment provides an excellent "deconstructive" analysis with realistic analysis with performance projections for recent 2017 VRX launches.
- However, I am affraid that, your sobering analysis will be met by extreme resistance from most VRX longs, who prefer "rosy" and over the top, "uber-bullish" projections.

*But the truth is incontrovertible...
And also note that 17-23 million is not actual sales for Siliq & Vyzulta combined to date but is the PROJECTED annual run rate based on sales so far.

Actual sales would be about 1/3 of that so about 6-8 million total sales to date for Siliq & Vyzulta combined. About in line with what I expected to see based on formulary placements.
Warwick Simons profile picture
Re Relistor - I thought the significant seven only included oral Relistor (the tablets), not the injectable? If so you need to take a big chunk out of your Relistor numbers above as the injectable was doing $15-20mn per quarter 18 months ago, before the tablets were launched.
The reason why I love Wall St. is because their are so many market movers need to pay their fund managers and traders big salary, therefore it is their job to create fear so they can profit when the stock price goes up or down. Only those investors possessed financial knowledge and do their own analysis will profit tremendously. If you don't have billions to move the stock price, the best way to profit is to embrace and accumulate while these sharks drive the price lower and at some point in time, they have no choice but to buy back shares as company performance will put them out of business if they stay shorted.
Wen, drama is good. Hedgie creates drama to buy back shares cheaper and load up for the next run into 30s.

$8.5 to $17 - April 24 to July 25
$11 to $24 - Nov 2 to Jan 5

$14.44 to $32 - Mar 2 to May 25
Wen P. profile picture
sk6688, I have some potential big runners:
DCIX last run from $1.56 to $29 in 3 days.
I sold before last run, missed a 20× bagger. So you know I almost bit off my hand.
See in my comments history for analysis. Book value $22, maybe it will have another run $1.70 to $15 in April, once the cash will be received from 5 sold ships.

EKSO last ER jumped 1 to 1.50 to 2.56 in 2 days. Then a news pushed it to 4.77. This coming ER on 3/13 has much better numbers to show and achievements for the 1st time.

INPX dropped 99% in a year, seemed bottomed, potential is limitless.
EGO the worst drop in gold miners, waiting on an arbitration to go from 1 to 4.

So much drama elsewhere, too. If we can stomach the temporary paper losses, not to chase high, but to build a core from bottom, I think risk and reward is worth the try.

Well, my money is tied to above 4 stocks at now. I want to watch VRX to see if any sign of spinoff.
My prediction is similar to sk6688 with slightly different timing. Based on the chart alone, I expect a near-term bottom around $14 in mid-May, followed by a new 52-week high to just shy of $30 in mid-July before another pullback to a higher low.
Wen, EGO looks interesting to me. I may get some shares next week and plan to hold for a year.
Wen P. profile picture
Why there is a 537K shares buy in AH?

Haven't looked at VRX for so long.
Why rumors are out there about IPO?
You're back in VRX?
Wen P. profile picture
Not yet. Watching for entry.

Mar.08 -- Safkhet Capital Founder and Chief Investment Office Fahmi Quadir discusses her short position on Valeant and the state of the pharmaceutical industry. She speaks with Bloomberg's Vonnie Quinn on "Bloomberg Markets."
And she is only 26. Super smart girl.
Many VRX longs have been investing for longer than she's been alive.
Me XMan profile picture
MNK ENDP will outdo VRX in 2018.
If you have more than 6 months horizon, buy Jan19 $12.5 and $15 calls and you can get 500% profit sometimes in Q3. I got into WYNN two weeks ago when everyone selling and now I am our with under 20% profit under 3 weeks. Buy when no one wants it and sell half when everyone loading up.
Took my profit in WYNN and waiting for Vrx goes below $15 to buy Jan calls.
Enjoy Investment profile picture
Undisclosed, typo
Hedgie will not allow the stock price go up until all the options expired worthless and after they buy back their short position. Two more months to go until next earnings reports.
Enjoy Investment profile picture
ackman has an undisclosed position. Is he selling calls?
Difficult for GS's analyst to predict sales in the next 4 quarters and in January he probably got the number from someone inside VRX after quarter end Dec 31.
If you're day trader, I would go to Wynn and other high flyers. Dead money for 6 weeks until April's option expired. If you're long term investors, then I would add if it goes lower. I hedged 30% of my long VRX with Cover Straddle by selling short term puts and calls and trade WYNN.
Board and insiders have not been buying.. 2 things. their guidance for growth from 2018-2021 is a lie or their is a major transaction in the works.
Enjoy Investment profile picture
paulson is trading
Good things lie ahead for vrx but this is dead money near term. Need to liquidate all my bios including vrx to pile into vtvt for a 50% March gain and then subsequent 4 bagger post Alzheimer’s readout. Then will be back....
Guys help me understand this. Piper analyst is saying he is not buying the hype about VRX new derma products. Does he have a point?
We'll find out in 3 months
cemanuel profile picture
He's an analyst so the default answer is no but there are rare exceptions.

You want to know the prospects google to product name and look for mentions in medical/pharma publications. It's one reason I'm high on Vyzulta, less so on the others. Vyzulta got a lot of coverage as a new product with a different MOA, didn't see a lot for the others (haven't looked lately).

Of course one of the real kickers for product sales doesn't come from what's in print but from medical conferences, quite often word of mouth when doctors talk to each other about what works and what doesn't. No way to track that.
Teva Pharmaceutical Industries (NYSE:TEVA) has increased the size of its offering of senior notes to $4.5B from $3.5B.The offering consists of $1.25B of 6.00% notes due 2024, $1.25B of 6.750% notes due 2028, €700M of 3.250% notes due 2022 and €900M of 4.500% notes due 2025. All will be priced at par.
What are the odds Salix is sold in the next 6-10 months? Valeant would refuse any offer under $11.5bln IMO. So are there any buyers out there willing to pay $11.5+?
No bp will buy a portfolio of drugs with looming patent expirations on the horizon, never seen it done.

Celgene just paid 9 billion for JUNO (I was long), a late stage biotech with no marketed or approved products... or almost 2 times the market cap of Valeant, for just the promise of it's pipeline, but it's oncology where the big bucks are at. So how much is a pipeline worth? Ask a bp.
What is the minimum price you think that the majority of Valeant's share holders would accept in sale?
I think $25 would get a lot of people’s attention. $30 and I think most people happily sell their shares.
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