Shares of Valeant Pharmaceuticals (NYSE:VRX), an embattled drugmaker that's mostly grown through acquisitions and price increases throughout the years, fell another 16% in April to more than a 10-year low, according to data from S&P Global Market Intelligence. The fuel behind investors' rush to the exit appears to be Valeant's ongoing debt concerns.
April was actually a pretty quiet month for Valeant in comparison with what it's dealt with over the prior year and a half.
As for the positives, it announced that its injectable plaque psoriasis treatment, Siliq, which is slated for a launch in the second half of this year, will be priced at at $3,500 a month, undercutting all other plaque psoriasis injectables on pharmacy shelves, based on price. It also recently announced that it had paid down $220 million in unscheduled debt payments. But that ends the very short list of positives.
The major worry for Wall Street and investors continues to be Valeant's debt, which totaled nearly $30 billion at the end of 2016. Valeant previously announced a $1.1 billion debt pay down associated with its sale of three medicated skincare products to L'Oreal for $1.3 billion, and its $820 million sale of Dendreon's assets to China's Sanpower during Q1. The company has also been aggressively pushing its maturity dates outward via debt restructurings to give it time to sell assets.
The issue is Valeant's assets aren't selling very quickly, and its peers aren't willing to pay the premium that Valeant needs to make a dent in its debt and improve its EBITDA (earnings before interest, taxes, depreciation, and amortization) to interest coverage ratio. The danger here is that even if the company is reducing its debt, weaker EBITDA from continuing operations and lost EBITDA from divested businesses may not help its EBITDA-to-interest coverage ratio, triggering a default with its senior lenders.
Though Valeant has taken baby steps forward with its debt maturity dates and a few divestments, its future is still very cloudy.
For starters, there's no clear catalyst to suggest its core operating segments are suddenly going to improve. I can't figure out how the company is going to generate 2% to 5% branded Rx growth in 2017 when its branded Rx segment delivered a 17% sales decline during the fourth quarter. Valeant has virtually no pricing power because of a watchful group of regulators in Washington, and its image has been tarnished among physicians and insurers. In fact, a rumored sale of Salix Pharmaceuticals late last year for $10 billion, which Valeant acquired for roughly $11 billion in 2015, would have netted Valeant a $1 billion loss had it gone through.
The company also hasn't set an EBITDA target that it's been able to hit for a year and a half. During its full-year earnings presentation, Valeant guided to $3.55 billion to $3.7 billion in full-year EBITDA and $1.85 billion in full-year debt servicing costs. That's a dangerously low ratio of 2-to-1 in an optimistic scenario, and Valeant's position is far from optimistic. It's possible we could see this important debt covenant measure fall well below 2-to-1 in 2017.
Despite being valued at or below its full-year EBITDA projections, investors would be wise to keep their distance from Valeant.