LOE Versus New Drug Launches
Valeant’s Apriso (ulcerative colitis) and Uceris tablets (mild to moderate ulcerative colitis) also face loss of exclusivity (“LOE”). With a combined $79 million in revenue they represent about 4% of Valeant’s total revenue and an estimated 5% of EBITDA (assumes 59% EBITDA margins). Given their revenue size, a hit to Apriso or Uceris tablets could hurt sentiment for the Valeant. When it comes to VRX it is all about sentiment. The stock can be volatile based on news of new drug launches, LOE or debt pare downs.
Management has tried to convince the market that Valeant has the R&D prowess to grow the top line through new drug launches. That remains to be seen. Siliq (psoriasis) and Vyzulta (glaucoma), are both expected to be launched this year. The psoriasis market is currently overcrowded and highly competitive. I doubt Siliq will be that successful even if Valeant under-prices the product vis-a-vis competitors. Vyzulta appears to be very promising; the question remains, “Will Vyzulta and other new products offset LOE?” I will only believe it when I see it.
What is not debatable is that Valeant had done a yeoman’s job in reducing its debt load. From Q1 2016 to Q3 2017 the company reduced debt by approximately $6 billion. It also announced divestitures of nearly $4 billion since the beginning of 2016; such divestitures have also allowed the company to cut expensive R&D products which has inured to the bottom line. VRX bulls have been ecstatic over the company’s survival prospects. That said, I believe the company is at an inflection point. Valeant has to forgo earnings from divested assets to pare debt and window dress the balance sheet. If revenue from new products cannot exceed LOE then top line growth could suffer and its credit metrics could deteriorate.
Conclusion
While paring debt Valeant has also stretched its payables which has accelerated cash flow. Management has proven excellent at window dressing the balance sheet, but can it run a real drug company? VRX trades at 8.6x run-rate EBITDA, yet revenue growth has eluded the company. I believe the good news is priced in already. VRX remains a sell amid LOE.
