Valeant Pharmaceuticals (NYSE:BHC) CEO Joe Papa still thinks the company is "the turnaround opportunity of a lifetime." After the drugmaker's fourth-quarter results, though, it's obvious there's still a lot of work to do before a turnaround is achieved.
In the conference call held Wednesday morning to discuss those Q4 results, Papa, along with CFO Paul Herendeen, provided the company's road map for the next few years. Here are five key ways Valeant hopes to turn things around and return to growth.
1. Double Ortho Dermatologics revenue over the next five years
Valeant's Ortho Dermatologics division revenue totaled $606 million in 2017. Papa said that the company's goal is to double that revenue over the next five years. There were three ways he said Valeant would try to achieve that goal.
First, Papa noted that Valeant increased its dermatology sales force by more than 25% in January 2018. This expanded sales team is already promoting plaque-psoriasis drug Siliq. Second, he said that the company would expand globally, particularly with its Solta aesthetics business, which Valeant recently combined with its Ortho Dermatologics unit. The company's third plan is to launch new products.
2. Make $1 billion or more in peak annual sales from the "significant seven"
Two of those anticipated new products are included in what Valeant has nicknamed its "significant seven." The company hopes to win approval from the Food and Drug Administration later this year for the drugs Duobrii and Jemdel, both for plaque psoriasis. Rounding out the "significant seven" are Relistor, for opioid-induced constipation; Bausch & Lomb's Ultra contact lens; Siliq; Lumify eye drops; and glaucoma treatment Vyzulta.
In 2017, the five already-approved products combined for less than $100 million in sales; however, Siliq wasn't launched until the third quarter of last year. Vyzulta won FDA approval in November and is now launching. Lumify obtained FDA approval in December, and should launch in the second quarter of 2018.
3. Continue reducing debt
Valeant has reduced its debt by more than 20% since the end of 2016's first quarter. The drugmaker accomplished this primarily through divestitures, including the sale of iNova Pharmaceuticals for $930 million. While these divestitures have taken a toll on Valeant's revenue, they were necessary.
Joe Papa and Paul Herendeen both spoke about the company's commitment to further reduce debt. The main way Valeant hopes to cut its debt is by using cash flow. Papa said, though, that Valeant could still look at additional sales of noncore assets. Herendeen also noted that "equity has to be on the table," referring to a potential stock offering. However, he said that raising cash through an equity offering is "not something that's urgent."
4. Improve operational efficiency
Papa stated that Valeant hopes to take out around $200 million from cost of goods sold (COGS) over the next five years. In 2017, the drugmaker's COGS totaled $2.5 billion. Another way the company intends to improve operational efficiency is to reduce working capital by roughly $100 million over the next five years.
Valeant has already made some progress in improving operational efficiency. Last year, the company increased operating cash flow by 10% compared to the prior year, as a result of lower operating expenses and working capital.
5. Focus on research and development
Papa said that Valeant's turnaround in the years ahead "will always be about launching new products." That means the company must focus on research and development.
Valeant plans to increase its R&D spending by more than 15% in 2018. That increase, however, will at best get the drugmaker back to its 2016 R&D investment level.
Valeant's management likes to talk primarily about "core organic growth" for its Bausch & Lomb/International and Salix businesses. By that term, they mean growth excluding the impact of divestitures and currency fluctuations. The reality, though, is that both of these factors continue to impact the company's financial results greatly.
Papa says that Valeant's turnaround phase is still in progress, but he also called 2018 a "trough year." A turnaround, at least from a revenue growth standpoint, won't begin until 2019 -- if then.
There's a lot riding on successful launches of new products. And to really come back, those new products must generate enough sales to offset declines from divestitures and any negative effects of foreign exchange. For now, Valeant's turnaround opportunity is still just an opportunity.