Bargain-hunting investor Francis Chou (Trades, Portfolio) scooped up Valeant shares in 2016 after several events decimated its stock price and other prominent investors, including Bill Ackman (Trades, Portfolio) and the Sequoia Fund, fled. But the company has been rallying since June to prices not hit since September 2017.
Valeant’s stock sank in 2015 when it came under investigation for drug price gouging. It also incurred scrutiny when it purchased an option to buy mail-order pharmacy Philidor. Valeant used the company to grow it sales and push name-brand drugs instead of cheaper generic alternatives. A short-seller report comparing the company to Enron also contributed to the spiral.
Part of Valeant’s rebound is due to its turnaround plan. One primary factor of the plan is paying down debt, which Valeant used to grow through acquisitions for years. Long-term debt reached a peak of $30.3 billion in 2015. In January, it paid $200 million on its senior secured term loans using cash on hand.
Since the first quarter of 2016, Valeant paid off more than $6.7 billion in debt, reducing the total to $25.5 billion. It plans to pay down more debt with operational cash flow. Valeant had interest expenses of $416 million on its debt as of the end of the March quarter. It had enough operating income at $743 million to make the payments.
First-quarter results also gave the stock a boost. In May, the company reported a 5% year-over-year decline in revenue to $1.995 billion. Organic growth was 2% when stripping the effect of 2017 divestitures and discontinuations and foreign exchange. Growth in its Salix business and Bausch + Lomb/International segment drove the increase in organic revenue. It was offset by declines in its Ortho Dermatologics business and U.S. Diversified Products segment, where its lost exclusivity on a group of products.
Valeant has streamlined its business by divesting about 12 businesses since 2016, choosing to narrow its focus to pharmaceuticals, medical devices and over-the-counter products used in eye health, gastroenterology and dermatology.
Chou, the Canada-based founder of Chou Funds, started buying the company in the first quarter of 2016 when its price averaged $75. He continued buying as the price plunged to an average of $12 in the second quarter of 2017.
It appeared that the investor was done with the stock in the fourth quarter of 2017 when he sold 95% of his stake, but it was not the case. Instead, he said in a May shareholder letter that he sold his pharmaceutical stocks at losses in order to reduce “a large tax burden” on his clients.
He bought back 1.5 million shares – about half his fourth-quarter position – in the first quarter at an average price around $19.
“In conclusion, we believe pharmaceutical stocks as a group are selling at attractive valuations, in comparison to the free cash flow and earnings they generate,” Chou quoted from a mid-2017 letter.
He also bought shares of health care stock Endo International (ENDP, Financial) in the first quarter.
Chou has 11.3% of his stock portfolio in Valeant. Other investors with sizable positions in Valeant are John Paulson (Trades, Portfolio), Robert Bruce (Trades, Portfolio) and Jeff Ubben (Trades, Portfolio).
