Valeant Stock: The Rally May Be Over, But The Struggle Is Not

Valeant Stock: The Rally May Be Over, But The Struggle Is Not - Valeant Pharmaceuticals Intl Inc
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Despite posting strong results, the troubles for Canada based specialty pharma company Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is far from over. In the last two trading sessions, shares of Canada basedtroubled drug makerhave lost over 7% after the company came out with a plan to raise more than $750 million in debt in a private offeringof 5.5% notes due in 2025. Valeant will use a part of the proceeds to pay down term loans due in 2022.

The recent correction has brought back Valeant stock below the 100-day moving average line. 100-day SMA hasprovided strong resistance to Valeant stock in past. Valeant stock has been unable to breach the 100-day SMA resistance line despite several attempts. The stock hadgone above the resistance line recently, propelled by the better than expected earnings, but is back below the trend line once again. The resistance from 100-day SMA is likely to keep a check on any rally in Valeant stock for now.
VRX Technical chart

Green shoots are visible.

Earlier, Valeant Pharma had posted better than expected top and bottom line numbers. Valeant had reported an adjusted EPS of $1.04, 16 cents higher than analysts estimate of an adjusted EPS of $0.88. Valeant Revenues came in $2.22 billion, $50 million higher than expected. Strength in its Bausch and Lomb eye-care business helped Valeant Pharma in delivering strong performance. Moreover, Valeant maintained its full-yearadjusted EBITDA guidance of $3.60 billion to $3.75 billion,despite divesting assets to reduce its debt pile.The company has also bought itself some breathing room by eliminating all long-term debt maturities until 2020 and all mandatory amortization requirements.

Valeant Pharma free cash flow and long term debt

On GAAP basis the company reported Net Profit of$1.30 billion, compared to a loss of $1.22 billion in the comparable quarter last year. That’s a remarkable improvement. It reduced total debt by about $6 billion between the end of the first quarter of 2016 and Nov. 7 and has exceeded its goal of paying down $5 billion in debt by February 2018. Valeant stock rallied by over 27.7% on the strong performance before correcting the last two trading sessions.
VRX net income chart

Valeant has still a long way to go.

However, it’s not all hunky-dory for Valeant. Despite beating the estimates, revenues were down by over 10% YoY and the remarkable improvement in Net Income was driven mainly by a tax benefit of about $1.4 billion. The poor performance of itsU.S. diversified products and branded businesses haveinvestors worried. Also, despite paying off $6 billionin debt, Valeant still has a boat load of debt sitting on its balance sheet. On September 30, the company had little over $27 billion in long-term debt. And the financial leverage has not improved.To quote Wells Fargos David Maris:

“The company highlighted several times how it has paid down debt ahead of its own schedule, but according to our estimates, leverage is higher now than it was a year ago or last quarter. Total debt to TTM adj. EBITDA by our calculation is now 7.20x vs. 6.65x a year ago, and is also higher sequentially (vs. 7.15x in 2Q17).”

There are concerns thatValeant revenues and margins could decline further in 2018 as more drugs with high margin face LOEs. Add to the fact that, R&D spending declined by 20% YoY, the chances of Valeant producing multiple winners in-house looks dim and the company is unlikely to go for acquisition once again. Its Dermatology segment is far from stable.Dermatology sales declined 34% YoY. The company also indicated thatmore likely than not, its tax burden is likely to increase in future, further eroding its margins. And the proposed tax reform could have a significant impact on Valeant, especiallyfrom the proposed 20% excise tax. In addition,Valeant continues to have a wide array of pending suits and ongoing investigations which could have a significant impact on the company’s financials.

Turnaround is still far away.

The current management led by Joe Papa has done a good job in reducing Valeant’s massive debt burden and bringing some stability to the core business. Valeant has also made some progress in getting Siliq and Vyzulta approved. The company expects the addressable market for Vyzutla to be around $1.6 billion dollar market. “Valeant is a very different company today than it was a year ago,” CEO Papa had said in a statement. And he is right. However, the turnaround is still far away. A lot will depend onVRX’s ability to meaningfully improve revenue trends for Xifaxan and the Dermatology business. Valeant stock continues to remain highly volatile and risky.

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