We’ve discussed Valeant Pharmaceuticals Intl Inc (NYSE:VRX) a number of times over the past few months, and the dominant topic of these discussions has been uncertainty. Uncertainty, that is, in relation to a number of different aspects – it’s business model and the impact pricing reform might have on operational capability, debt, management and, finally, transparency. From highs just shy of $260 a share in July 2015, Valeant stock bottomed out at $26.11 earlier this week – a 90% decline. The company closed Wednesday’s session up 19%, however, and is up a further 6.6% premarket on Thursday. The gain comes on the back of some positive updates from Valeant, but are also fueled by Pershing Square’s Bill Ackman, who addressed Valeant and its current situation in his company’s first quarter, 2016 conference call.
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Of course, Ackman has a vested interest in painting Valeant in a positive light. Having said this, the majority of his comments ring as both valid and neutral, and there looks to be a solid argument for the current trough proving the longer term bottom in Valeant’s market capitalization. So, is now the time to pick up an exposure to Valeant?
Here’s an overview of the argument for this thesis.
First, the long standing review of the company’s operations with mail-order pharmacy Philidor RX Services LLC is now complete, and Valeant has told us that it won’t need to restate any of the already released numbers as part of its full year review (which we’ll talk a little more about shortly). This is important, as it means the pre-high financials that drove Valeant stock to its July 2015 levels are valid, and in turn, that there is some quantifiable support for its strength. Next, the company just announced that its creditors had approved a one-month extension on the reporting of both its full year 2015, and its final quarter 2015 reports. This means it won’t have to release the former until May 31, and the latter until July 31. This is hugely important, as it allows Valeant to avoid what would have amounted to a default on the NYSE listing regulations – a default that would have had some very serious ramifications.
The company expects to report its 2015 10K by the end of this month, and this is going to be a big milestone. The numbers are obviously important, but the simple fact that the data is out there is almost as important. Why? Because a large number of investors cannot invest in a company that doesn’t have up to date financials available to it. This goes for both individual investors and institutional investors. With the data released, Valeant becomes (and to use Ackman’s term here) investable again. As a result, chances are we’ll see an inflow of speculative capital on 10K release, purely as a result of the company falling back within the terms of investment.
The impact of potential pricing reform has weighed on the company for the last nine months, and has been one of the primary driving factors behind its decline. However, not only would any reform take years to implement (regardless of who wins in the US in November), it will almost certainly not impact Valeant’s existing portfolio. The company has one of the strongest portfolio’s in big pharma, and the ethical and socioeconomic impact of cost aside, commands some of the highest prices for said portfolio in the industry. Xifaxan, its IBS drug, generated $148 million and $220 million during the first two quarters of its commercialization (Q2 and Q3 2015), and the company has stated it expects a Q4 sales total that would round off 2015 for the drug in excess of $1 billion. Jublia, its fungal drug, generates more than $100 million each quarter. Wellbutrin and SofLens generated $92 and $84 million respectively in the last two quarters for which data is available. All in, Valeant generated $2.8 billion revenues from its portfolio during the third quarter of 2015, for a net income of $49.4 million. At its current market capitalization of a little over $12 billion, it’s incredible cheap when compared to some of the multiples of its peers.
With a fresh CEO reportedly likely in the next few weeks, and the concurrent resolution of the mail order/financial reporting issues, there’s no reason we won’t see Valeant rally high double or even treble digits before the second quarter is out. Longer term, there remains certain risks, of course. The company is investigation from a number of regulatory authorities, and subject to a number of class action lawsuits, and these will likely play on sentiment as things move forward. As things stand, however, the downside these risks imply look dwarfed by the potential upside on issue resolution.
