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Valeant Pharmaceuticals Danielle Buglino


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Valeant Pharmaceuticals Danielle Buglino

  1. 1. Valeant Pharmaceuticals International, Inc. Danielle Buglino Summer 2016 • Company Overview • What Happened • Predictions vs. Q1 Report • June 7th Conference Call • Going Forward • Ratings Page 1 of 14
  2. 2. 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- counter products.  Specialization in dermatology, eye health, gastrointestinal issues, neurology, and health care.  North America, Europe, Middle East, Latin America, and Asia Pacific. Page 2 of 14
  3. 3. 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 tactics.  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  In recent months, Michael Pearson has stepped down from the position as CEO and has been replaced by Joseph Papa, who has now been the CEO of Valeant for about 30 days.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. Page 3 of 14 1 year chart of VRX
  4. 4. Predictions and Guidelines Prior to Q1 Release Actual Results June 7, 2016 Guidance March 15, 2016 Market Consensus Total GAAP Revenue $2.37B $2.3-2.4B $2.4B GAAP EPS $(1.08) N/A N/A Adjusted EPS (non- GAAP) $1.27 $1.18- $1.43 $1.36 Adjusted EBITDA (non- GAAP) $1.0B N/A $1.025B Guidance June 7, 2016 Guidance March 15, 2016 Market Consensus Total GAAP Revenue $9.9- $10.1B $11.0- $11.2B $10.86B GAAP EPS N/A N/A N/A Adjusted EPS (non- GAAP) $6.60- $7.00 $8.50-$9.50 $8.47 Adjusted EBITDA (non- GAAP) $4.80- $4.95b $5.60- $5.80b $5.3B 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 predicting. • Their guidelines for their Total GAAP Revenue and Adjusted EPS have been lowered as well. Page 4 of 14
  5. 5. 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. Page 5 of 14
  6. 6. Going Forward  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. Page 6 of 14
  7. 7. Cantor Fitzgerald Bullish Outlook  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 asset sales).  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 $491M. Page 7 of 14
  8. 8. 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 ◦ Reflects  Declining profitability.  High financial leverage and slow pace of deleveraging.  Business and reputation challenges facing the investigated pricing strategies. • Senior unsecured notes B3 (LGD 5) • Reflects • Good cash flows • Debt amortization is modest & expect to remain within free cash flow levels until late 2018. • Good margins • Global presence Page 8 of 14
  9. 9. Ratings Post Q1 Report  Goldman Sachs ◦ 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 pressures. • 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. Page 9 of 14
  10. 10.  Jefferies ◦ Buy  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.  Upside ◦ Sales growth exceeds expectations. ◦ Leverage ratio declines more quickly than anticipated. ◦ Investigations and controversies resolved with limited financial impact. • Downside • Jubila and Xifaxan Rx reducing peak sales potential. • Legal/regulatory issues. • GI salesforce disruptions. • ASP issues with dermatology products. • High leverage ratio. Page 10 of 14
  11. 11.  J.P. Morgan ◦ Overweight  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.  Positives ◦ 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 margins. Page 11 of 14
  12. 12.  Stifel ◦ Buy  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.  Positives ◦ Maintains sufficient cash flow ($1.73B) and EBITDA to fulfill debt covenants. ◦ Belief that Dermatology franchise is recovering from the shift from Philidor to Walgreens. ◦ Restructure of company and portfolio will help to optimize Valeant’s resources and focus in on their core areas of expertise. Page 12 of 14
  13. 13. Summary of New Consensus Estimates Wells Fargo Securities Jefferies J.P. Morgan Stifel Price Target Previous: $25-$30 Current: $17-$22 Previous: $53.00 Current: $40.00 Previous: $60.00 Current: $50.00 Previous: $65.00 Current: $55.00 FY 2016 Revenue Current: $10.46B Previous: $11.03B Current: $10.08B Previous: $10.77B Current: $9.97B Previous: $10.96B Current: $10.04B FY 2017 Revenue Current: $11.27B Previous: $12.06B Current: $10.87B Previous: $11.48B Current: $10.39B Previous: $12.26B Current: $10.61B Q2 Adjusted EPS Previous: $2.28 Current: $1.77 Previous: $2.16 Current: $1.60 Previous: $2.04 Current: $1.63 Current: $1.62 FY 2016 Adjusted EPS Previous: $8.81 Current: $6.74 Previous: $8.71 Current: $6.80 Previous: $8.05 Current: $6.70 Previous: $8.56 Current: $6.66 FY 2017 Adjusted EPS Previous: $9.85 Current: $7.72 Previous: $10.57 Current: $7.94 Previous: $9.38 Current: $8.03 Previous: $10.94 Current: $8.96 Page 13 of 14
  14. 14. 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 supportive hands. • 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. Page 14 of 14