Shares of Valeant Pharmaceuticals (NYSE:BHC), an embattled pharmaceutical company that's primary grown over the years through acquisitions and strong pricing power, surged 30% in August based on data from S&P Global Market Intelligence. Though there were catalysts galore last month, Valeant's gains can largely be traced to three key events.
Perhaps the biggest surprise of the month was the company's second-quarter earnings results. For the quarter, Valeant generated $2.42 billion in sales, an 11% decline from the prior-year quarter, and generated an adjusted profit of $1.40 per share. Comparably, Wall Street had been looking for $2.46 billion in sales and $1.48 in EPS. But, investors were willing to overlook this weakness because the company stuck to its full-year profit forecast of $6.60 to $7 in EPS. Since Valeant had essentially halved its 2016 forecast since mid-December, the simple fact that it stood by its already-lowered estimates encouraged investors.
Secondly, Valeant announced mid-month that it had poached Paul Herendeen from animal health company Zoetis to become its new chief financial officer. After installing Joseph Papa, who manned the helm at Perrigo for a decade, as its CEO, and grabbing a high-quality CFO in Herendeen, Valeant is showing investors that it's very serious about turning things around and righting the ship.
The final catalyst can be traced to Valeant's (once again) renegotiated debt terms with its lenders. Valeant's current pace put it dangerously close to violating its debt covenants in 2016 based on its EBITDA forecast for the full-year. In response, it worked out new terms with its lenders that would allow Valeant to earn as little as $3.4 billion in EBITDA (its current forecast calls for between $4.8 billion and $4.95 billion in EBITDA) for the year without violating its debt terms. In return, Valeant agreed to a $28 million one-time fee and higher lending rates that could cost about $50 million more this year and $55 million more in 2017.
Some progress is obviously being made on Valeant's $30.77 billion debt load, with the company announcing plans during the second quarter to eventually jettison non-core assets which generate about $2 billion in annual revenue (about 20% of its expected 2016 sales). Valeant's management believes it could net up to $8 billion from the sale of these non-core assets.
Unfortunately, I'm still not sold that on Valeant as a bargain here. If Valeant chooses not to sell its core assets (which is the current game plan), it may not be able to reduce its debt enough to loosen the metaphorical noose around its neck. Conversely, if Valeant winds up giving up too much, it could compromise its future growth prospects. No matter which path it takes, I suspect Valeant could struggle to get a fair price for its assets with its peers fully aware of its struggles.
There are other aspects of Valeant that are concerning as well. Despite bringing in an experienced management team, Valeant is paying through the nose to retain Papa and Herendeen. High executive pay is a theme for Valeant, which hardly seems prudent with $30+ billion in debt.
Valeant's business model is also struggling mightily. Its relatively new distribution agreement with Walgreens Boots Alliance is resulting in some scripts being filled at a loss to Valeant. Furthermore, multiple legal probes into the company's actions could threaten to add fines or sales restrictions onto an already dicey situation.
My suggestion remains the same as it's been all along: avoid Valeant until we see tangible evidence of a turnaround.