Per Reuters an FDA advisory panel recently recommended that Pfizer’s (PFE) Xeljanx should be approved to treat patients with moderate-to-severe ulcerative colitis:
Xeljanz, which is already approved to treat rheumatoid arthritis and psoriatic arthritis, raked in $1.35 billion in 2017 sales for Pfizer.
Ulcerative colitis is a chronic condition triggered by an abnormal immune response that creates long-lasting inflammation and ulcers in the large intestine lining. It is the most common inflammatory bowel disease.
Analysts at BMO Capital Markets expect Xeljanz to have sales of $3.5 billion in 2021, with ulcerative colitis accounting for about 10 percent.
BMO Capital implies Xelzanx could generate about $350 million in revenue from ulcerative colitis in three years. In 2017 Valeant’s ulcerative colitis drugs (Apriso, Uceris) generated $284 million in revenue.
The Situation
VRX has risen over 45% Y/Y but is off by double-digits since its Q4 earnings report when it missed on revenue. A lot has changed for Valeant since Q4 2016 when the company seemed ready to wilt under $30 billion in debt. The company has announced over $4 billion in asset sales over the past two years. This has helped reduce its debt load to $26 billion at Q4 2017. Add in $2.8 billion in tax recoveries in 2017 and VRX bulls began to bet on the company’s survival. Q4 2017 results were a reality check, however. Total revenue of $2.2 billion was off 10% Y/Y:
Revenue declines were largely driven by asset sales. However, low single-digit revenue growth from Bausch & Lomb and Salix was sobering. These units were expected to be the company’s growth engines. It begs the question, “What is all the excitement for?”
Secondly, Valeant still faces loss of exclusivity (“LOE”) and generic competition for certain of its brands. Last month Teva (TEVA) launched generic Syprine; Syprine generated Q4 revenue of $18 million (1% of total revenue). It is housed within the U.S. Diversified which has segment margins of 70% versus 37% for the other segments. Per Valeant’s Q4 management presentation the company is also bracing for LOE for Apriso (ulcerative colitis) and Uceris (mild-to-moderate ulcerative colitis) in the second half of 2018.
Apriso and Uceris generated Q4 revenue of $71 million. This equated to 3% of total revenue and 17% of revenue from Salix. This is important. Salix is expected to be a growth engine; if 17% of its revenue is impacted by LOE this year then it could create negative sentiment for the stock. I believe Xeljanx would be in direct competition with Apriso. Ulcerative colitis is tough to tackle, and Xeljanx could potentially exploit the market for patients that are most difficult to treat.
I understand Xeljanx has a PDUFA date of June 2018. If approved it could be the first oral Janus kinase (JAK) inhibitor used to treat ulcerative colitis. It could potentially take some market share away from Apriso or impact prices. Nonetheless, more competition from Xeljanx or generics could cut deeply into the revenue of Apriso and Salix.
EBITDA Could Become A Point Of Emphasis
Valeant has been very active with asset sales, debt pare downs and press releases of new drugs. Siliq (psoriasis) and Vyzulta (glaucoma) could potentially drive top-line growth, but now it’s time for management to deliver. Revenue declined by double-digits and EBITDA was also off by 20% Y/Y. Valeant’s EBITDA margin declined from 41% in Q4 2016 to 36% in the most recent quarter; this margin decline also came on lower revenue.
Past LOE has come at the expense of U.S. Diversified which has the highest EBITDA margins. About 24% of Valeant’s revenue and 37% of its EBITDA is now derived from Branded Rx (ex-Salix) and U.S. Diversified which are either slow-growth to declining. Now that the noise of asset sales has been removed investors can begin to understand Valeant’s true revenue and earnings growth. Currently it does not look promising. The company’s debt/run-rate EBITDA is still at an alarming 7.9x. It begs the question, “Other than to spike the share price what was did asset divestitures really accomplish?”
Conclusion
VRX bulls tend not to price in LOE until it actually materializes. Generic competition for Apriso and Uceris could happen this year or in 2019. However, I believe the Xeljanx threat is real. Its arrival could potentially hurt revenue for Apriso and Salix and cause more headwinds for revenue and EBITDA growth. VRX remains a sell.
Actor Chad L. Coleman will host Trump And The Global Economy February 6, 2018 in Brooklyn.
The panel will include Christopher Townley (land baron), Reverend Conrad Tillard (activist, WHCR 90.3 FM), Wuyi Jacobs (AfrobeatRadio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The event will take place at South Oxford Space in Fort Greene, Brooklyn from 6PM – 8PM. Tickets are available on Eventbrite. Come early and bring friends.
Mr. Coleman is best known for his role as fan-favorite ‘Tyreese’ in one of the most popular cable series of all time, the Golden Globe® nominated series “The Walking Dead” ‘and as the reformed criminal “Dennis ‘Cutty’ Wise” in Emmy® award nominated HBO drama series “The Wire.” Coleman currently stars in the highly- new, hour-long FOX comedy series, “The Orville” playing the role of ‘Klyden.’ Created, executive produced, and starring Seth MacFarlane (“Family Guy”) and directed by Jon Favreau (IRON MAD, THE JUNGLE BOOK), the comedic science fiction series set 300 years in the future and follows the adventures of the U.S.S. Orville, a not-so-top-of-the-line exploratory ship in Earth’s interstellar fleet. The first season premiered on September 10th on FOX and has been picked up for a second season. ‘
According to Ralph Baker who founded Trump And The Global Economy:
“We are excited to work with Chad to help spread the word about Trump And The Global Economy. These are trying times we live in and the community is dependent on artists like Mr. Coleman to continue to tell our stories through their music, film, plays, books, etc. Brooklyn has a Rich, vibrant, art community. We would love for the art world and the broader community come out to network and take in what the panel has to say.”
The town hall brings together a cross-section of individuals to discuss everything from President Trump’s policies on economics, immigration, and foreign affairs, to what his election says about America. Individuals on the front lines will bring you real information about the Trump administration that impacts the community.
The most recent Trump And The Global Economy town hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Mr. Jacobs and Mr. Baker. The event was well-received by the community. We parsed through President Trump’s proposed tax plan and high net worth individuals could potentially game the system by shifting income around. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
The June 27 2017 event included Mr. Tillard, John McLaughin, who did the polling for President Donald Trump during his presidential election, Mr. Jacobs and Mr. Baker. Trump And The Global Economy is a quarterly event and is fast becoming the “must see” event in Brooklyn.
