They say that one man's trash is another man's treasure, and Valeant Pharmaceuticals (NYSE:BHC) stock probably fits in the trash category for many right now. Shares of the embattled drugmaker have nose-dived more than 80% in 2016. However, CEO Joe Papa sees his company as a potential treasure. At this week's Stifel Healthcare Conference, Papa said that "Valeant is the turnaround opportunity of a lifetime."
Here's how he thinks Valeant can make this statement become a reality.
Valeant's biggest problem is its $30 billion of debt. One way that the company's executives plan to reduce that is by selling off assets. But which parts of its business is it willing to sell?
Papa reiterated in his comments at the conference this week that Valeant's preference is to sell non-core assets. He defined core assets in two ways: by business segment and geography. By business segments, he said, Bausch + Lomb eye care, dermatology, and consumer products qualify, and geographically, the U.S. and Canada are its core markets. That theoretically leaves everything else as non-core -- and potentially up for sale.
The company previously committed to reducing its debt by around $5 billion by early 2018. Papa said that selling non-core assets could generate proceeds of roughly $8 billion -- which is more than Valeant's current market cap of $6.3 billion.
Moreover, Papa didn't rule out selling core assets. "If somebody puts in an offer that is significant, will have to evaluate those offers," he said. According to The Wall Street Journal, that's exactly what has happened. The newspaper reported earlier in November that Japanese pharmaceutical company Takeda is interested in buying Valeant's Salix business for around $10 billion. There could be another bidder for Salix as well.
While selling off assets could help Valeant lower its debt load, that's not enough to turn things around entirely. Papa acknowledged that the company must also return to growth, a goal he thinks is achievable.
In his view, Valeant has already made the correct first step by "resetting the team." He mentioned key executive changes made over the last several months, including hiring a new CFO, controller, head of quality, and general counsel.
Another important element to restoring growth will be repairing Valeant's relationship with Walgreens (NASDAQ:WBA). Papa has mentioned in the past that there were some initial problems with the pharmacy chain, particularly with pricing for some products. However, he said that there has been "great progress" in the past three to four months, with dermatology average selling prices now up around 40%.
There is "still work to do," according to Papa, but he remains confident that the long-term agreement between the two companies will pay off and is excited about its prospects.
The most important ingredients in the growth recipe, though, will be new products, and Papa put anti-inflammatory drug brodalumab at the top of the list. He also has high expectations for glaucoma drug latanoprostene bunod. Although the Food and Drug Administration rejected the drug in July over issues at a manufacturing facility, Papa thinks Valeant should have those issues addressed by the end of the year and could launch the product by mid-2017.
One growth driver mentioned by Papa might not be around if a sale of the Salix business goes through. Xifaxan, which treats irritable bowel syndrome with diarrhea (IBS-D), has been one of the few bright spots for Valeant this year.
Great opportunity or another Enron?
Well-known value investor Bill Miller recently said that he thinks Valeant stock is worth twice its current price. On the other hand, Jim Chanos, founder and managing partner of Kynikos Associates, stated this week that "Valeant epitomizes everything that went wrong with the marketplace." Chanos went on to say that hedge funds have lost more money on the pharmaceutical company than they did on failed energy company Enron.
Although Chanos' assertion about funds losing a lot of money on Valeant is correct, I suspect that Papa and Miller could be right over the long run. A sale of the Salix business would be a good start. Selling off other non-core assets would also help. So would improving the Walgreens relationship and launching new products like brodalumab.
The company has a long way to go and a lot of risks remaining, though. Valeant can't afford to stumble by executing poorly. Still, I think this trashed stock could possibly turn into treasure given enough time. it just might be "the turnaround opportunity of a lifetime."