Earnings Preview: Valeant Pharmaceuticals
Feb. 21, 2018 3:04 AM ET
About: Valeant Pharmaceuticals International, Inc. (VRX), Includes: TEVA
Chris Lau
Summary
•Markets are wavering over Valeant's prospects, ahead of its earnings report later this month.
•Watch for growth in sales of Salix's Xifaxan.
•Strong B+L eye care sales required for stock to get to the $20+ target price.
• This idea was discussed in more depth with members of my private investing community, DIY Value Investing.
When Valeant Pharmaceuticals (VRX) reports quarterly earnings on Feb. 28 before the market opens, shareholders will look for more data points pointing to revenue stabilization and even growth in its core businesses. Markets are on the fence with the stock. After its last earnings report, investors bid the stock to as high as $24.43, up from below $12. Yet after a strong reception for its debt offering in Dec. 2017 and $200 million debt payment on Jan. 25, investors will also look for initial sales numbers for its new products.
Valeant’s earnings report will mention such milestones as the FDA accepting its application for Jemdel. But two key sales figures will matter the most. First, revenue from Xifaxan must show a more than relative increase following a surge in sales staff hiring. The progress of its reformulation and the timeline for that product launch will be of interest. After Wells Fargo questioned the severity of looming competition, CEO Joe Papa will need to reassure investors that the Salix division is on schedule or ahead. Though there are already dozens of medications prescribed for traveler’s diarrhea, rendering Cosmo’s rifamycin launch a non-event, the Xifaxan reformulation will accelerate drug sales.
Below: Both Valeant and Teva Pharmaceuticals (TEVA) fell in late-January when markets corrected. Teva's Debt/Equity is half that of Valeant. Both companies have an expected EPS decline in the range of 5 - 8 percent.
Last quarter, Xifaxan revenue grew by 5 percent, giving the Salix unit an overall performance boost. Growth in the low double-digits in the fourth quarter will allay fears that the unit is facing any profit margin pressure. Still, it’s worth noting that after Wells Fargo issued the bearish note, Cantor Fitzgerald responded by writing that it saw no fundamental reasons for the stock’s weakness, did not see any significant competition risk from Cosmo Pharma and reiterated an “overweight” rating on VRX stock.
2018 Outlook
Valeant’s earnings per share are still expected to fall by around 9 percent in 2018 and fall 7.8 percent over the next five years. At a 3.5x forward P/E, shares already price in a steady, if not sharply reduced, profit decline. The company’s asset sales schedule of non-core assets will further push lower Valeant’s debt/equity ratio. It already refinanced upcoming debt, so management’s next goal is stabilizing the B+L and Salix unit. Investors may expect further asset sales, giving the company even more chances to improve its balance sheet.
In the fourth quarter, management may give some sign of initial product sales for SILIQ. If the company reports a weak uptake for the drug treating psoriasis, it will need to outline the steps it will take to strengthen prescription count. On a more positive note, B+L’s new Biotrue product should gain good traction. The unit’s market share loss in contact lenses is approaching an end as Valeant raises the marketing and R&D spend at B+L.
Valuation
17 Wall Street analysts have an average price target of $17.29 on VRX stock. The most notable analyst reports are those whose ranking is one-star out of five and whose price target is well-below Valeant’s recent share price.