Valeant Pharmaceuticals International Inc. (VRX, Financial) reported a better-than-expected quarterly profit this morning as a result of lowered costs and strength in its Bausch and Lomb subsidiary, yet its net loss widened as the company is feeling pricing pressure.
Valeant has lost a lot of trust in the last two years. This is an understatement since in just 24 months, the stock has dropped over 90% from its highs in the 200 range. It has taken a lot of hedge funds with it, but the roster of gurus that own Valeant remains impressive.
John Paulson (Trades, Portfolio) owns 5.58% of the company, more than Bill Ackman (Trades, Portfolio)’s 5.21% ownership. These two join ValueAct Capital’s Jeff Ubben (Trades, Portfolio) (4.31%), Chris Davis (Trades, Portfolio) (2.01%), Jim Simons (Trades, Portfolio) (0.84%) and Steven Cohen (Trades, Portfolio) (call for 1.3 million shares) as very successful fund managers with billions under management - all who own Valeant.
Valeant has rebounded since the first of the year after reports that it reached agreements to sell $2.1 billion in assets, split between cosmetic giant L'Oreal (XPAR:OR, Financial), which bought the company’s skin-care brands for $1.3 billion, and Sanpower Group buying its Dendreon Pharmaceuticals unit. The company will also pay down $5 billion of its $30 billion in debt in the next 18 months - debt piled up mainly through its acquisitions.
Valeant’s use of debt and aggressive pricing strategies coupled with a failed deal to merge with Allergan (AGN, Financial) were all contributing factors to the crushing blow dealt the stock. Now, under the leadership of CEO Joe Papa, the Canadian company is looking to put the pieces back together. He owns over 2.4 million shares of the stock and recently vested another 202,000. Previously, Papa was the chairman and CEO of Perrigo (PRGO, Financial), from 2006 to 2016 he lead the company’s extraordinary growth - growth he hopes to duplicate at Valeant.
The start of that turnaround is being placed on Siliq, a recently approved treatment for plaque psoriasis. Valeant shares in the profits with AstraZeneca (AZN, Financial), but the drug has proven better efficacy then the current market leader, Johnson & Johnson’s (JNJ, Financial) Stelera.
Valeant has also increased its sales force by 40% (250 people) to help push two stomach and digestive relief drugs - Xifaxan (rifaximin) and Relistor (methylnaltrexone). The sales force will be dedicated to primary care physicians, which Senior Vice President and General Manager Mark McKenna says, "will complement our existing primary care team and will allow us to capture nearly 75% of the primary care market opportunity." Ambitious!
Despite the debt, acquisitions have helped Valeant create a resilient business. The company competes well in a number of product categories, such as ophthalmology (e.g. drugs and contact lenses making up approximately 20% of sales), gastrointestinal (20%) and emerging markets (20%).
Valeant has the largest dermatology portfolio in the industry. Nearly 40% of the company's revenue is shielded from insurance reimbursement risk between consumer health, contact lenses and surgical device products. The company does have some exposure to U.S. government reimbursement with Medicare and Medicaid accounting for 15% of sales, which could go either way since the Trump administration and Congress are looking to repeal and replace the Affordable Care Act. Trump is speaking on Capitol Hill today.
One of the best things is Valeant has many segments of its business where the need for innovation is quite low. Management has avoided high risk-reward gambles on blockbuster drugs. A tactic that has often been criticized, yet one that helps it avoid high research and development costs.
All in all, average earning estimates are calling for $1.21 for fourth-quarter 2016, $5.43 for the whole year and $4.97 for 2017. Revenue estimates for 2017 are approximately $9.12 billion. If these are the actual numbers, or anything close to these figures are reported on the bottom line, Valeant could double in price.
With today’s announcement, it earned $1.26 per share after items and the company guided within range, saying it expects between $8.9 billion to 9.1 billion in revenue for 2017. So, will this prompt the big money to buy more, hold or sell? The company’s net loss of $515 million was already assumed, but investors will have to wait and see what happens going forward. It is worth a flyer, if only 1% to 5% of your own portfolio.
Disclosure: I have no positions in any stocks mentioned in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
