There's no tiptoeing around it: 2016 was a miserable year for shareholders of Valeant Pharmaceuticals (NYSE:BHC). With a year-to-date loss of 86% through Dec. 29, Valeant would make a strong candidate for worst stock of the year.
However, despite its well-documented struggles, Valeant is also incredibly inexpensive, assuming the company can hit a profit forecast that's been lowered three times for fiscal 2016. Based on its most recent update during the third quarter, Valeant is on track to produce $5.40 in full-year earnings per share at the midpoint and $4.3 billion in EBITDA at the midpoint. This means Valeant is valued at less than three times its projected profit and less than 1.5 times its forecast EBITDA. By all measures, that's incredibly cheap. The question, of course, is whether Valeant can actually hit these figures in 2016 and beyond or if this is one gigantic value trap.
The answer to this question will probably be determined by how well Valeant's issues are tackled in 2017. In particular, here are Valeant's biggest market-moving catalysts you'll want to keep your eyes on.
Which asset sale pathway will Valeant take?
Perhaps the biggest "X factor" for Valeant in 2017 is how it will choose to chip away at the $30.4 billion in debt it ended the third quarter with. New CEO Joseph Papa and his management team have made it very clear that Valeant needs financial breathing room, and the only way to get it is by divesting some of its assets.
Initially, Papa had suggested that Valeant would focus on selling only its non-core assets, which account for about 20% of its annual revenue. Papa believed these assets would yield 11 times their EBITDA, or about $8 billion, when sold. However, Papa has also suggested that he and his team are open to the idea of selling Valeant's core assets (Salix Pharmaceuticals and/or Bausch & Lomb) for the "right price."
Now here's the dilemma Valeant faces: Its peers are fully aware of its struggles and are not willing to pay a premium or get into a bidding war for Valeant's assets. Thus Valeant has had a hard time disposing of its non-core assets for an attractive price. For instance, Valeant only managed to knock about $380 million off its long-term debt from the sequential second quarter. But if Valeant chooses to dispose of its valued core assets in order to reduce its debt, then it will also be giving up a vast majority of its future growth opportunities. Beyond Salix Pharmaceuticals, most of Valeant's product portfolio is filled with older, mature drugs that rely on price increases to stay afloat.
Valeant essentially has to pick its poison in 2016.
Will Trump tackle prescription drug reform?
Building on the first catalyst, President-elect Donald Trump is also likely to dictate how well or poorly Valeant's stock performs in 2017.
Trump made a number of promises during his campaign, including individual and corporate tax reform, a huge infrastructure spending bill over the next decade, and the repeal and replacement of the Affordable Care Act. Among these keynote promises, Trump has also pledged to lower drug prices in the U.S., which is one of the very few things he and opponent Hillary Clinton agreed on. What prescription drug reforms might look like is anyone's guess at this point. However, Trump did note in his seven-point healthcare reform plan that he would like to see Americans able to buy prescription drugs from overseas markets, such as Canada, where drug prices can be lower.
Prescription drug reform would be bad news for the entire drugmaking industry, but it would be especially tough on companies like Valeant, which have older product portfolios. Lawmakers have been closely monitoring price hikes on mature products where no new innovation has been brought to the table, and unsurprisingly, Valeant remains on regulators' radars.
If Trump has a full plate in 2017 and leaves drug pricing alone, then Valeant may have some upside potential, as it will retain some of its pricing power. On the other hand, if Trump does tackle prescription drug reform, then Valeant's woes could continue.
Will federal prosecutors come after Valeant?
Finally, Valeant's legal situation could hold some bearing on its 2017 performance.
In November, federal prosecutors in New York, who had been investigating Valeant and its now-former drug distributor Philidor Rx Services, filed criminal charges against the former CEO of Philidor, Andrew Davenport, and the former VP of Valeant's Access Solution's Team, Gary Tanner. Prosecutors allege that Tanner was steering a disproportionate amount of business toward Philidor in order to line Davenport's pockets. In return, Tanner was receiving cash kickbacks.
Making matters even worse, it only came to light in 2016 that Philidor was an owned entity of Valeant. If Philidor wasn't disclosing its relationship with Valeant to insurers or remaining a neutral party, then it could be construed as demonstrating favoritism toward Valeant's more expensive branded therapies. If federal prosecutors choose to further go after Valeant and/or Philidor, then they could hit both companies with fines and impose sales restrictions on Valeant.
The amount of legal clarity we get in 2017 will have a lot influence on Valeant's full-year stock performance.
What should you do?
Even though Valeant appears cheap, given the laundry list of problems it's entering 2017 with, my suggestion would be to stick to the sidelines.
Valeant still hasn't demonstrated that any of its core businesses are healthy, nor has it shown that its new drug distribution partnership with Walgreens Boots Alliance will be a positive for the company. And, as noted above, it still has a number of seemingly no-win decisions to make in 2017. While I wouldn't expect a repeat swan dive in the upcoming year, I struggle to see what catalysts will push this stock notably higher.