VALEANT’S UPSIDE
Papa pointing to positives
Valeant Pharmaceuticals International Inc.’s CEO says he is convinced the embattled drugmaker remains misunderstood and should be headed for a turnaround, but investors are less certain.
The stock began falling in premarket trading after the company posted disappointing first-quarter earnings and slashed its full-year outlook Tuesday, and lost 19.46 per cent by 9:33 a.m. in Toronto. It recovered slightly from the initial drop, closing at $31.47, down 14.95 per cent.
Some analysts weren’t much more optimistic about Valeant’s outlook, with some warning the company’s troubles could even get worse.
Quarterly results aside, Piper Jaffray analyst David Ansellem says he’s more concerned about the future performance of Valeant’s key products and whether the Laval-based company will be able to meet payments on its nearly US$31 billion debt.
“That backdrop, along with management conceding that the distractions in the organization and the damage to the company’s reputation have had a real impact on results, lead us to wonder if there is further risk to the revised 2016 guidance,” wrote Ansellem in a note to investors on Tuesday.
Valeant’s revised full-year revenue guidance for 2016 is now US$9.9 to US$10.1 billion, down from the US$11 to US$11.2 billion it projected in March.
The primary causes for this US$1.1-billion revision are a US$410-million drop in Valeant’s dermatology business and a US$390-million drop in sales of Xifaxan, its irritable bowel syndrome treatment.
Valeant says it has hit some “speed bumps” in starting up a new distribution program with Walgreens Boots Alliance Inc., including having a percentage of its dermatology products selling at prices below previous expectations.
“In some places that average selling price is negative. That means every time a prescription goes out the door we’re taping dollar bills to that prescription,” Valeant CEO Joseph Papa said.
“I’m confident it will get fixed. It doesn’t make sense to continue as is.”
S&P Global analyst Jeffrey Loo says that although Valeant may have been overly optimistic about how quickly it would start profiting from the Walgreens program, it will eventually stabilize based on the strength of the products.
“I think once things stabilize the growth should come back at a modest clip,” he said.
Papa says he plans to transform the company in a three-step process that could take several years to accomplish: The current “stabilization process” will take three to six months, followed by the “turnaround stage” and ultimately a “transformation stage.”
“Valeant has a portfolio of world class brands, a strong new product pipeline and dedicated leaders who are committed to doing what is right and what is necessary to turn this company around,” said Papa in a call to investors after the earnings release.
“An exciting new product pipeline continues to be undervalued and misunderstood, and I hope to change that perception.”
The company has been delaying financial results for about six weeks because of earnings restatements, which led to default notices from some bondholders. Papa says the company should be compliant in its future loan repayments for 2016 and beyond.
Ansellem, however, says he’s not so sure.
“It is not clear to us that the dynamics surrounding the U.S. dermatology segment and Xifaxan are poised to get better in the nearterm,” he said.
Ansellem says he is troubled by Valeant’s commentary that, although Xifaxan is the company’s top-selling product and is being prescribed more frequently, sales aren’t rising as much as hoped because of sales-force turnover.
“We have a hard time viewing this as the main issue for Xifaxan, given that underlying demand has actually been fairly solid,” he said.
Papa says Valeant plans to keep core assets — such as Bausch & Lomb, Salix, gastrointestinal, dermatology and consumer products — but will consider selling non-core assets to pay down debt and reduce the complexity of its business.
“I think we’ve got a very bright future, but clearly we have some challenges,” he said.
Net loss in the first quarter was US$373.7 million, or a loss of US$1.08 per diluted share, as compared to net income of US$97.7 million, US28 cents per diluted share, in the first quarter of 2015.
Valeant is forecasting its adjusted earnings per share to be in the range of US$6.60 to US$7 in 2016, short of its previous guidance of US$8.50 to US$9.50 under former CEO Michael Pearson in March.
The market reaction to the drugmaker’s first quarter results shows shareholders are not convinced of a turnaround just yet either.
Papa is nearly a month into his tenure as chief executive, coming from over-the-counter and generic drugmaker Perrigo Co. to take over the company when Pearson announced his resignation following months of intense public criticism.
The company’s decline from a peak share price of $263.70 began last September when Democratic presidential candidate Hillary Clinton said she would go after the company for slashing research and development and then hiking drug prices, a cause other U.S. lawmakers took on, leading to senior Valeant executives being brought in front of both Congress and Senate committees earlier this year.
Beginning in fall 2015, the stock entered a tailspin that was exacerbated by analysts and journalists exposing the company’s secretive relationship with Philidor Rx Services, alleging the affiliated mail order specialty pharmacy aggressively steered customers to expensive drugs sold by Valeant.
That prompted the Valeant to shut Philidor and make changes to the way it did business, including an internal investigation by its board of directors and the arrangement to sell lower-priced medication through the large, publicfacing Walgreens pharmacy chain.
I think we’ve got a very bright future, but clearly we have some challenges.