Valeant Pharmaceuticals: Why One Bear is Staying Bearish
Last week, shares of Valeant Pharmaceuticals International (VRX) soared 35% after the beaten-down specialty-pharmaceutical company raised its 2017 adjusted EBITDA guidance, causing an abrupt shift in sentiment. But can Valeant keep soaring?
In a blog post, Bronte Capital's John Hemptonexplains why he doesn't buy the good news, and the entire post is worth reading. But one of the keys points he makes is that companies have only two ways of increasing their EBITDA--by increasing revenue or by cutting cost. Valeant's revenue isn't growing, Hempton says, so they must be cutting cost. He doesn't think that's possible:
So Valeant revenues are on track to miss guidance by about half a billion dollars. But they are going to beat their adjusted EBITDA number.
This can only be done if they have decreased their costs by an unanticipated half a billion dollars.
Possible: but I would like to know what costs they are cutting that they had not previously anticipated.
Remember this is a company that was notorious for cutting costs (possibly to excess) whenever they purchased an asset.
This was the company who fired almost all non-revenue producing people. Scientists doing research: fire them. Compliance officers: fire them.
So I am left with a choice. Either:
As you can guess common sense leads me to the third choice. The adjusted EBITDA number and guidance remain BS.
The market, however, is still taking the bullish view on Valeant Pharmaceuticals International. Its shares have gained 2.7% to $13.96 at 9:50 a.m. today.