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Bear of the Day: Valeant Pharmaceuticals (VRX)

I don't enjoy kicking this once-beloved company when it's down, but Valeant Pharmaceuticals (VRX) has it coming (again) as earnings estimates slip.

In the past week, another investment bank revised lower their EPS projection for this year, knocking the the Zacks Consensus down to $5.17 from $5.30.

And in the past 90 days, the profit outlook has fallen from $7.70. This puts annual growth at -5.6% after a 2016 that could end up at over -30% "growth."

This is why VRX shares are in the cellar of the Zacks Rank again.

But it doesn't mean you should run out and sell yours only $1 from multi-year lows. The company is still projected to deliver nearly $9.2 billion in sales this year with hundreds of products and steady earners like Jublia and Wellbutrin.

The unknown risks are what happens with any legal investigations or the company's massive debt load. The current debt-to-equity ratio is over 7X for this $4.7 billion company and the debt-to-capital ratio may be over 87X.

Analysts Weigh In On the Debt Issue

On January 11, Canaccord Genuity analyst Neil Maruoka was encouraged by Valeant's recent moves to address the leverage...

"Valeant has taken its first significant steps towards de-levering its balance sheet, announcing the divestiture of Dendreon and several dermatology brands (including CereVe) for combined cash consideration of ~$2.1 billion."

The analyst noted that the downside of this move is that the company may be forced to sell more quality drug franchises like CereVe, thus hurting sales and operating cash flow. "Following these divestitures, we estimate that Valeant will have total debt of $28.3 billion remaining, representing a leverage ratio of 6.9x forward EBITDA (down from 7.1x previously)."

On January 20, Deutsche Bank reiterated their Hold rating on VRX shares and dropped their price target from $24 to $20. Analyst Gregg Gilbert talked about the company's challenges...

"We expect VRX to provide its 2017 outlook sometime between now and when it reports 4Q results (date not yet set). Recall that management provided 'hand signals' on its 3Q call in November that revenue and EBITDA would be down in 2017 vs. 2016. In anticipation of this event, we have updated our model to reflect recent developments and management commentary. The key elements of our changes relate to recently-announced divestitures, loss of exclusivity (LOE) for several products in 2016/17, and FX headwinds."

But he was also optimistic in the short-term about further asset sales. And there was just such market chatter on January 25 according to StreetInsider.com quoting Bloomberg sources.

The website reported "Valeant Pharma's central and eastern European assets have attracted interest from potential private equity bidders, according to Bloomberg, citing sources. CVC Capital Partners, Advent International, and other drugmakers would look at the assets if they were put up for sale, the report said, though there has been no formal sale process. One European private equity firm has made an expression of interest but Valeant hasn't made a decision to engage. The region could fetch $1 billion or more."

While selling off assets to reduce debt may be a good strategy for this troubled company, I wouldn't touch it for a while until you see the earnings estimates turnaround. The Zacks Rank will let you know.

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Valeant Pharmaceuticals International, Inc. (VRX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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