• Company Overview
• What Happened
• Predictions vs. Q1 Report
• June 7th Conference Call
• Going Forward
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Valeant Pharmaceuticals Overview
Multinational pharmaceutical company
CEO: Joseph C. Papa
CFO: Robert Rosiello
Diverse product portfolio with a focus on branded
pharmaceuticals, branded generics, and over-the-
Specialization in dermatology, eye health,
gastrointestinal issues, neurology, and health care.
North America, Europe, Middle East, Latin America,
and Asia Pacific.
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What has been happening…
Former CEO of Valeant, Michael Pearson, had raised the market value of Valeant from $2
billion in 2008 to $90 billion in 2015. The stock’s high in the past year was $263.81
He did this through aggressive acquisition of other firms and severe cutting of R&D costs.
Since then, Valeant’s shares have dropped 88% in the last year. The SEC has been
investigating Valeant’s pricing strategies because they use non-GAAP regulated accounting
Valeant currently holds more than $31 billion of debt.
In recent months, Michael Pearson has stepped down from the position as CEO and has
been replaced by Joseph Papa, who has now been the CEO of Valeant for about 30 days.
Valeant was late to filing their 2016 10-Q report and was given 60 days by the SEC to file
it before they must default. They released their Q1 report on the morning of Tuesday, June
7th, and held a conference call at 8:00AM.
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1 year chart
Predictions and Guidelines
Prior to Q1 Release
$2.37B $2.3-2.4B $2.4B
GAAP EPS $(1.08) N/A N/A
$1.0B N/A $1.025B
GAAP EPS N/A N/A N/A
Q1 2016 Full Year
• Valeant’s quarterly revenue was in line with
projections and the Adjusted EPS was within its
guideline range of $1.18-$1.43, although it was
below the market forecast of $1.36.
• Quarterly Adjusted EBITDA was only $1.0B,
which is not on track to reach it’s guidance of
$4.80-$4.95 or the market consensus of $5.3B.
• Valeant’s updated guideline has their Adjusted
EBITDA lowered from $5.60-$5.80B to $4.80-
$4.95B, which is significantly lower than what
they released in March and what the market was
• Their guidelines for their Total GAAP Revenue and
Adjusted EPS have been lowered as well.
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June 7th, 2016
Valeant’s Q1 report is released and conference call takes place at 8:00AM.
VRX closed the previous day, June 6th 2016, at $28.85 a share.
June 7th premarket shares to a multi-year low of $23.25, nearly a 20% drop from the
previous day’s close.
June 7th VRX dropped to a 6 year low of $22.52 by 10:00AM, a daily 22% plunge and a
yearly 91% plunge since its peak in August. VRX closed at $24.64, down 14.59%.
The conference call at 8:00AM was Joseph Papa’s first quarterly report as CEO; he
expressed high hopes for a bright and profitable future at Valeant. They intend to stay
in line with their debt covenants to pay down their $31B+ in debt, invest in better
relationships with patients and investors, focus on R&D in their core businesses, help fix
the dermatology business (which they stated was a significant reason for their
reduction in revenue forecast), and work to fix and clear up all investigations about
their pricing strategies.
Papa and CFO Robert Rosiello also stated they had high hopes for their new partnership
with Walgreens, despite the negative ASP’s on the dermatological products.
Many analysts had questions relating to the acquisition of Valeant and what their
EBITDA would be worth, to which Papa made no clear answers.
Papa says that some of the reasons for the reduction in their profit forecasts include
negative publicity, “speed bumps” in the Walgreens program, Xifaxan’s sales not being
as high as expected, and challenges facing Dermatology and Salix.
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Joe Papa expressed an optimistic attitude about Valeant, saying
that they are on track to meeting their loan and debt
requirements. They are committed to pay down $1.7B this year;
they have already paid $735M and still have $273M in required
payments before the year’s end.
Liquidity is a positive for Valeant; they have $1.3B in cash.
Papa and Rosiello both expressed how non-GAAP measures were
better indicators of Valeant’s operations for investors.
Valeant announced that they will host a live webcast Tuesday,
June 14th 2016, at 9:00AM ET of the company’s annual meeting
of shareholders for 2015.
The core assets that Valeant plans to focus on include Bausch +
Lomb, Salix, Dermatology, and Consumer health.
Provenge, the cancer drug, could be a noncore asset that may be
divested for debt repayment.
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Optimistic about Valeant long term; believes that their challenges will
take time to be rectified.
Believes Xifaxan and Dermatology products are fixable challenges.
Confident In Valeant’s ability to pay down their $1.7B target this year
and $5.5B by the end of 2017 ($4.0B internally generated and $1.5B from
Once 10-Q is released they will be current with their financial reporting.
Understand it is necessary to lower guidelines under new management in
order to meet or exceed them.
Noteworthy that Valeant is adding Relister Oral, Latanprostene Bunod,
Brodalumab, and other new products to its pipeline.
Positive that they intend to sell noncore assets for simplicity of their
business and for debt repayment.
Positive that their cash from operations increased 14% to $588M from
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Moody’s Negative Rating
Rating outlook remains negative because of uncertainty
regarding trends being able to stabilize and whether or not
Valeant will meet its debt repayment targets.
Corporate Family Rating at B2
High financial leverage and slow pace of deleveraging.
Business and reputation challenges facing the investigated pricing strategies.
• Senior unsecured notes B3 (LGD 5)
• Good cash flows
• Debt amortization is modest & expect to remain within free cash flow
levels until late 2018.
• Good margins
• Global presence
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Ratings Post Q1 Report
◦ In-Line rated
Confident in their commitment to pay down $1.7B of debt this year from free
cash flows and asset sales, as well as the durability of BOL and Xifaxan and
Valeant’s free cash flows.
Worried about downgrade risk, Walgreens contract risk, and pricing
• Wells Fargo Securities
• Underperform/V; Overweight
• Extremely unconfident in Valeant’s ability to generate enough free cash flows
to pay off debt and re-stabilize the business.
• Lowered 2016 estimated adjusted EPS from $8.81 to $6.74.
• Lowered 2017 estimated adjusted EPS from $9.85 to $7.72.
• Lowered valuation range from $25-$30 to $17-$22 using an EV/EBITDA
multiple of 7x.
• Believe to be too risky.
• Negative ASP’s with Walgreens program.
• Inability to accurately predict GAAP earnings.
• Inability of cash flow from operations to cover debt repayment targets.
• Fines and penalties regarding investigations.
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Lowered price target to $40.00 from $53.00.
Lowered Q2 estimated adjusted EPS from $2.16 to $1.60.
Lowered 2016 FY estimated adjusted EPS from $8.71 to $6.80.
Lowered 2016 FY estimated revenue from $11.0B to $10.0B.
◦ Sales growth exceeds expectations.
◦ Leverage ratio declines more quickly than anticipated.
◦ Investigations and controversies resolved with limited financial impact.
• Jubila and Xifaxan Rx reducing peak sales potential.
• Legal/regulatory issues.
• GI salesforce disruptions.
• ASP issues with dermatology products.
• High leverage ratio.
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Lowered price target from $60.00 to $50.00.
Lowered Q2 estimated adjusted EPS from $2.04 to $1.63.
Lowered 2016 FY estimated adjusted EPS from $8.05 to $6.70.
Lowered 2017 FY estimated EPS from $9.38 to $8.03.
Lowered 2016 estimated revenue from $10.77B to $9.97B.
Lowered 2016 estimated EBITDA to $4.8B.
Expect a long road to recovery.
View changes to fix Walgreens partnership as manageable.
Hopeful to see Valeant stabilize the business and meet performance targets.
◦ Healthy growth for the Bausch & Lomb.
◦ Emerging market businesses.
◦ Growth prospect for Xifaxan.
◦ Neuro/Other is highly profitable with >90% gross margins and >60%+ operating
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Lowered price target from $65.00 to $55.00.
Lowered estimated 2016 FY revenue from $10.96B to $10.04B.
Lowered estimated 2017 FY revenue from $12.26B to $10.61B.
Lowered 2016 FY estimated adjusted EPS from $8.56 to $6.66.
◦ Maintains sufficient cash flow ($1.73B) and EBITDA to fulfill debt covenants.
◦ Belief that Dermatology franchise is recovering from the shift from Philidor to
◦ Restructure of company and portfolio will help to optimize Valeant’s resources and focus
in on their core areas of expertise.
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Morgan Stanley Analyst Call
June 8th, 2016 1:30PM ET
David Risinger; healthcare equity analyst at Morgan Stanley.
◦ Worried about execution risk.
◦ Wondering what Valeant might choose to divest, what negative impact it could
have on EBITDA, and what price(s) they would get.
◦ Worried about investigations and lawsuits.
◦ Not understanding what Valeant is planning on doing in regards to the Walgreens
agreement and the negative ASP’s.
• John Lane; healthcare credit analyst at Morgan Stanley.
• Wondering why bonds weren’t lower; possible that bonds are in more
• Despite free cash flows being a small percentage of Valeant’s debt, $1.7B cash
flows are substantial.
• Believes the front end of the business will out-perform the back end.
• Downgrades are possible.
• Believes selling of entire company is unlikely because their pipeline is not much
to offer for a strategic bid.
• If the termination of the Walgreens deal brings positive ASP’s, it could be a
good thing; but wondering why Walgreens would be incentivized to work with
Valeant and if Valeant would have to pay any fees.
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