If there was a "Bad News Bears" team for the healthcare sector, Valeant Pharmaceuticals International, Inc. (NYSE:BHC) and Rite Aid (NYSE:RAD) would be starters on the team for sure. Valeant has lost over half of its market cap in the last 12 months, while Rite Aid's market cap has plunged nearly 70% in the same period.
Both companies are hoping to turn things around. But which beaten-down stock is the better buy? Here's how Valeant and Rite Aid compare.
The case for Valeant
Probably the best news for Valeant right now is its progress on reducing debt. Thanks to selling several non-core assets, the drugmaker expects to pay down $5 billion in debt earlier than its initial target date of February 2018. That will leave Valeant with a remaining debt load of around $27 billion. However, the company doesn't have any debt maturities until 2020.
Valeant's Salix business is another positive, especially gastrointestinal drug Xifaxan. In the second quarter, the company reported 13% year-over-year growth for the unit despite the divestiture of hereditary angioedema drug Ruconest.
The Bausch+Lomb/international segment makes the most revenue for Valeant. Although the company's divestitures caused revenue for the segment to fall slightly in the second quarter, year-over-year organic growth was a respectable 6%.
Valeant also hopes to score wins from new product launches. By the end of this year, Valeant should have launched over 50 new products. The company has around 135 research and development projects underway, with 80% of them launching before 2020.
CEO Joe Papa joined Valeant last year. He promised to reduce debt, bring in a new management team, decrease key sales staff turnover, and ultimately return the company to growth. So far, Papa has delivered on the first three goals. If the company can complete a few more divestitures to further lower the debt and achieve success with its new products, Valeant could be "the turnaround opportunity of a lifetime" that Joe Papa has stated that it is.
The case for Rite Aid
Rite Aid shareholders were devastated when the planned acquisition by Walgreens Boots Alliance (NASDAQ:WBA) fell through this summer. That left Rite Aid in a somewhat similar position to Valeant -- stuck with a huge debt load. Like Valeant, though, Rite Aid could significantly reduce that debt if all goes well.
After throwing in the towel to buy Rite Aid outright, Walgreen proposed to buy 2,186 stores from Rite Aid for nearly $5.2 billion in cash. If the Federal Trade Commission (FTC) approves the deal, Rite Aid thinks it will be able to put most of that money to use toward lowering its debt.
Another nice part of the proposed agreement is that Rite Aid would be able to buy prescription drugs through Walgreens Boots Alliance for 10 years. Practically speaking, that would give Rite Aid costs similar to those that Walgreens pays.
Assuming the FTC gives a green light, Rite Aid would have around 2,300 stores after the deal closed. It would also retain the pharmacy benefits management company it acquired in 2015, EnvisionRx.
Rite Aid's price-to-sales ratio is a staggeringly low 0.08. While the pharmacy retailer posted losses in both quarters so far this year, it has been profitable in the not-too-distant past. The new Walgreens deal would leave Rite Aid a smaller company, for sure, but it should also have much lower debt -- and interest expenses. That certainly helps in returning to profitability.
Rite Aid stock seems to have stabilized. If nothing derails the Walgreens purchase of some of its stores, it's not out of the question that the stock rebounds somewhat.
For many investors, the best choice might be to stay away from both of these stocks. Valeant and Rite Aid face considerable risks. There's no guarantee that either company can turn things around anytime soon. But we're trying to find which of these two stocks is the better pick. In my view, Rite Aid gets the nod.
I think that there's a reasonable chance that the company will be bought out by a private equity firm when the dust settles from the Walgreens deal. Walgreens is willing to pay roughly $2.4 million per store. Rite Aid's current market cap prices its remaining stores in the ballpark of $1.1 million per store. That difference probably makes Rite Aid the better buy all by itself.