After disclosing today that the FDA has given a no-go to Duobrii lotion for topical plaque psoriasis, shares of Valeant Pharmaceuticals (NYSE:BHC) lost 12.3% of their value on Monday.
Valeant Pharmaceuticals was once one of healthcare's worst performing stocks, however, a turnaround plan that included new management, asset sales, and paying down debt has led to market-beating returns in 2017 and 2018.
Unfortunately, at least some of the optimism stemming from Valeant's turnaround has been due to the potential to double sales of its Ortho Dermatologics segment by launching new drugs, including Duobrii.
The FDA's issuance of a complete response letter for Duobrii, rather than an approval letter, indefinitely delays any timeline for Duobrii contributing to Valeant's plan to spark sales growth in that segment. Management says that the rejection isn't due to efficacy or safety, but that it's due to "questions regarding pharmacokinetic data."
Valeant probably won't have much more to say on the matter until it sits down with the FDA to discuss its questions in more depth. Afterwards, it should be able to provide investors with a clearer understanding of the setback and, hopefully, timing for a resubmission of Duobrii's application for approval.
Valeant's been able to lower its debt by over 20% since Q1 2016, but it still has $25.3 billion in debt, and financing that debt isn't cheap. In Q1 2018, its interest expense was $416 million, and that's significant given its gross profit was only $1.42 billion in the quarter.
Duobrii's setback is disappointing because it could slow plans for further reduce debt, however, it's only one of seven drugs Valeant's said has the potential to add $1 billion to sales by 2022 and the company's first quarter performance was good enough for it to increase its 2018 sales outlook. Management now expects sales of between $8.15 billion and $8.35 billion, up from $8.1 billion to $8.3 billion previously. Importantly, it's guiding for $3.15 billion to $3.3 billion in non-GAAP EBITDA, and that should keep it above 1.5 times EBITDA to interest expense covenant that would trigger a default on its debt.
The improving guidance and its ability to navigate its debt so far is encouraging, but there's admittedly work to do. Unfortunately, that work might take longer to complete now because of the setback to Duobrii. How much longer will depend on how management's conversation goes with the FDA, so investors will want to keep an eye out for any updates.