Has Valeant Run Out Of Catalysts?

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Valeant (VRX) bulls continue to promote the stock and deny reality. Management has talked up asset sales and product development, but they have yet to improve the company’s fundamentals. Last month Mizuho’s Irina Koffler lowered her price target due to several weaknesses in the business. The company’s financial performance supports Mizuho’s assessment. Valeant could be running out of catalysts. I explain below.

Asset Sales Expected To Come To A Halt

To pare its debt load Valeant has announced nearly $4 billion in asset sales since 2016. It has completed over $2 billion so far. The problem with asset sales is [i] the assets buyers are likely interested in Valeant’s most attractive growth properties and [ii] the remaining properties (sans Bausch & Lomb) could be considered the dregs of the business. That means slower growth properties must be able to service the company’s $28 billion debt load and defend Valeant’s enterprise value of nearly 8.8x run-rate EBITDA (Q2 EBITDA annualized).

That could be a difficult task. First of all, each asset sale must be at or above Valeant’s intrinsic valuation or the stock could fall. It also must exceed the unit’s carrying value on the balance sheet or Valeant could incur an asset impairment charge. I believe the company pulled Salix off the market in the second half of 2016 because it did not meet those two tests.

The company’s Q2 revenue and EBITDA fell Y/Y by 8% and 21%, respectively. Over that same period debt was only reduced by about 11%. In my opinion, asset sales to reduce debt have been nothing more than window dressing. Management has intimated it will halt asset sales. The company might have been better off simply raising equity; however, that could have sank the stock price.

Siliq Could Be A Question Mark

Psoriasis drug Siliq is expected to be another catalyst for the company. It gives Valeant access to an $8 billion market with an expected annual growth rate in the mid-single digits. Bulls were ecstatic when the drug received FDA approval in Q1 of this year. However, Wells Fargo’s (WFC) David Maris questions Valeant’s competitiveness in the psoriasis space:

In addition, VRX has still not launched its drug (in 2016, VRX thought it would be launched in 2016 – now it says 2H17). With Taltz from Lilly, Humira from Abbvie, Cosentyx from Novartis, and now this new competitor from J&J, we do not see VRX as competitive in this market, especially with the marketing dollars others are spending and the black box warning Valeant’s drug has (which none of the others have). Add to this that Valeant’s drug Siliq is dosed every two weeks, while others have far fewer injections. For example, the new approval from J&J is dosed every eight weeks according to press reports and Cosentyx is dosed every four weeks. We have peak sales in our model of $250MM for Valeant’s Siliq and this may prove optimistic given the competition.

When Siliq was first approved I did not envision it being more intrusive than competitors, nor did I expect Johnson & Johnson’s (JNJ) newly approved Tremfya to enter the market. These could create additional obstacles. Siliq will also come with a black box warning and is not expected to have the same marketing heft as competitors. These issues make Siliq a question mark, in opinion.

The counter argument is that Siliq has shown higher efficacy than Johnson & Johnson’s blockbuster drug, Stelera, which generated 2016 revenue of $3.2 billion from psoriasis and psoriatic arthritis. Siliq could become a niche product, yet it might not live up to previous expectations. The question now becomes whether peek sales are $250 million as suggested by Maris, or $600 million as previously suggested by Credit Suisse?

Conclusion

To my dismay, VRX is up over 70% off its 52-week low just prior to Q1 earnings. News of asset sales and the launch of Siliq have been catalysts for the stock. However, Valeant’s fundamentals have not improved, and I do not expect Siliq’s launch to turn around the near-term slide in earnings. At some point the stock might trade less on sentiment and more on fundamentals. Q3 could determine whether the company has run out of catalysts. I continue to rate VRX a sell.

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