Shares of Valeant Pharmaceuticals (NYSE:VRX), an embattled drugmaker that has primarily grown via acquisition and drug-price hikes in recent years, skyrocketed by 44% in June, according to data from S&P Global Market Intelligence. No single event can be pinpointed for this surge in Valeant's share price. Instead, four factors look to be responsible for pushing Valeant's stock higher.
To begin with, Valeant announced the sale of Australia's iNova Pharmaceuticals for $930 million. The for-sale sign had been on iNova's front lawn since September 2016, but the mere fact that Valeant found a buyer and will be able to use the proceeds from its sales to pay down a portion of its debt has investors happy. As a reminder, Valeant ended the first quarter with $28.54 billion in debt, down $3.6 billion from its all-time high in 2016.
Second, Valeant completed its sale of Dendreon's assets, which included Provenge, a cancer immunotherapy treatment for advanced prostate cancer, for $819.9 million to China's Sanpower. The sale was announced earlier this year, but it took a few months to close. Its closure should allow Valeant to push its total debt below $28 billion when it reports its second-quarter results.
Third, it was all about John Paulson in June. Paulson's hedge-fund increased its stake in Valeant on May 11 by adding 2.72 million additional shares, though this purchase was only made public in a recent regulatory filing. Paulson & Co. was already Valeant's largest shareholder, and it now owns in excess of 21 million shares, or 6.3% of outstanding shares. This news compliments the announcement that John Paulson joined Valeant's board of directors in June. Having Paulson's interests (and that of his investors) tied to that of current shareholders is viewed as a good thing.
Finally, rumors of a possible debt swap had Valeant's stock galloping higher toward the end of June. Evercore ISI analyst Umer Raffat suggested a debt-to-equity swap may be on the horizon, which would help to alleviate some of Valeant's debt issues and potentially add value to the company.
Add those catalysts together, and you have Valeant's best performance in a long time.
The big question, of course, is whether this run-up in Valeant's share price can last. I'm not so certain it can. Though Valeant did report its first profit in six quarters recently, and its core Bausch & Lomb segment delivered solid 4% constant currency growth, there's a lot not to like about Valeant.
For instance, Valeant would not have been profitable in the first quarter without a one-time tax benefit. Similarly, while its Bausch & Lomb core segment shined, its other core segment, branded Rx, flopped once again, with sales down 9%.
But what's most unforgivable from the standpoint of shareholders is Valeant's debt situation. Valeant has made progress toward reducing its total debt -- no one will deny that. However, its debt covenants continue to worsen. In short, Valeant's lenders want assurances that their loans are safe. They look to the company's EBITDA-to-interest coverage ratio (i.e., the total costs of servicing its debt, including interest and fees) to answer this question. In the first quarter, Valeant generated only $861 million in EBITDA, but it spent $471 million in interest expenses. That's a ratio of just 1.83 to 1, and it's once again getting dangerously close to default levels, which could trigger faster loan repayments, even with pushed-out maturities. Every time Valeant restructures its debt, it agrees to fees and higher interest rates. Also, every time it sells assets, it sheds debt and EBITDA.
Based on the data we've seen, Valeant isn't making any real progress. It's dug itself into a deeper hole in terms of its EBITDA-to-interest coverage ratio, and its overall business is a mess given its lack of pricing power. Despite its incredible run in June, this Fool would suggest avoiding Valeant for the time being.
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