It's been a long time since Valeant Pharmaceuticals (BHC 0.95%) stock was in a legitimate uptrend. Despite the hiring of a new CEO last year to right the ship, Valeant's share price has continued to fall.
The question that investors must ask now isn't when Valeant will turn things around. Instead, the key question is whether it will happen at all. Can Valeant Pharmaceuticals ever regain its mojo?
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Why it won't happen
Let's first put to rest the notion that reducing its debt load will somehow make things magically better for Valeant. It won't.
Granted, a lower debt would allow the company to breathe somewhat easier. After all, Valeant paid a whopping $1.84 billion in interest expense last year. That's a huge sum of money that the drugmaker wasn't able to use for other worthwhile purposes -- like, say, developing new drugs that could ensure the survival of the company.
The latest reports are that Valeant is having trouble getting the amount of money it wanted for selling off iNova. Apparently, Valeant hoped to receive $1 billion for the subsidiary, which sells prescription drugs and over-the-counter products in Australia, New Zealand, Southeast Asia, and South Africa. However, The Australian reported that potential buyers are bidding closer to $900 million.
My view is that receiving $100 million or so less than expected isn't a crushing blow for Valeant in its effort to things around. The company paid $625 million up front for iNova back in 2011 and was on the hook for another $75 million in potential milestone payments. At least Valeant appears to be on track to make a reasonable level of profit on the deal. It could be worse.
The bigger issue, though, is that debt reduction simply isn't enough by itself to turn things around for Valeant. Even if CEO Joe Papa fully achieves his goal to reduce the debt by $5 billion through sale of assets, I don't expect investors to flock back into Valeant stock. The company must start seeing earnings growth before that will happen.
What it will take
Valeant lost $2.4 billion last year. To return to earnings growth, the drugmaker has to first make up that gap. But even that goal is more difficult that it appears. Valeant lost patent exclusivity for several products in 2016 and faces the loss of even more this year. These losses are expected to negatively impact 2017 earnings by around $715 million. So Valeant needs to find roughly $3.1 billion in new profits -- just to get back to breakeven.
However, the stock market would react positively if Valeant could achieve significant improvement in adjusted earnings. Adjusting away things like amortization of intangible assets and goodwill impairment helps tremendously. Will Valeant be able to return to adjusted earnings growth anytime soon? Unfortunately, no. The company expects lower adjusted earnings in 2017 than it reported last year.
What about adjusted earnings growth in 2018? Valeant plans to launch more than 50 new products this year that could really begin to pay off in 2018 and beyond. That should help.
One product that the company has high hopes for is Siliq (brodalumab). The drug received U.S. regulatory approval for treating plaque psoriasis in February. Valeant reported positive results from a late-stage clinical study in which Siliq proved more effective than Stelara, a drug that generated $3.2 billion in sales for Johnson & Johnson last year.
Don't expect Siliq to be nearly as big a hit as Stelara, though. Siliq comes with a black-box warning related to suicidal ideation and behavior. RBC Capital analyst Douglas Miehm projects peak sales for the drug of around $400 million by 2020, with sales of perhaps $170 million next year.
New sales from Siliq will help, but Valeant needs a lot more additional revenue and profits to return to growth. Sales for the oral version of opioid-induced-constipation drug Relistor could pick up in 2017. Valeant launches its Bausch & Lomb contact lenses for astigmatism this year. The company also has another psoriasis product, IDP-118, that could potentially win regulatory approval in 2018.
Mojo no-go?
Will all of these new products prove to be the ticket for Valeant to become what Joe Papa calls "the greatest turnaround opportunity of a lifetime"? Maybe, but I wouldn't count on it.
Papa says that Valeant stabilized in 2016, will turn things around this year and next year, and will be transformed in 2018 and beyond. I don't question that he has taken some of the right steps. Selling off assets was a must for Valeant. So was launching new products. Still, I can't share Joe Papa's optimism about where things are going for the beleaguered company. A return to any mojo for Valeant seems increasingly more likely to be a no-go.
