Investing in Pharma Sector: Canadian Case Study (VRX)

Investing in Pharma Sector: Canadian Case Study, by Dr Almaz Tolymbek, Canada 1
Valeant Pharmaceuticals Intl. Inc.
(VRX)
Investing in Pharma Sector:
Canadian Case Study:

Investing in Healthcare Sector: Canadian Case Study, by Dr Almaz Tolymbek, Canada 2
Why Study Investments
and Financial Markets?
1. Financial markets channel funds from
investors to companies including healthcare
ones thereby promoting economic efficiency
2. Financial markets are a key factor in
producing growth of private healthcare
sector and reducing its borrowing costs
3. Financial markets affect funding options and
behavior of pharmaceutical firms

The Bond Market & Interest Rates
 A bond is a debt instrument that
promises periodic payments for a
specified time
 An interest rate is the cost of borrowing
or the price paid on the rental of funds
when a borrower issues bonds
 Corporate or government bonds are
fixed-income instruments

Investing in Healthcare Sector: Canadian Case Study, by
Dr Almaz Tolymbek, Canada
4
The Bond Market & Interest Rates

The Stock Market
 A stock represents a share of ownership
in a company (corporation)
 A stock is an investment instrument that
is a claim on the earnings and assets of
that company (corporation)

Stock Market

Financial Institutions
and Banking
 Financial Intermediaries - institutions that
borrow funds from people who have saved
and make loans to other people
 Banks - institutions that accept deposits and
make loans
 Other Financial Institutions - insurance
companies, finance companies, pension
funds, mutual funds and investment banks

Money and Business Cycles

Money and the Price Level

Money Growth and Inflation

Money Growth
and Interest Rates

How Investors Think and Operate
 Return-Risk Trade-off
 Portfolio Investment framework
 Basic supply and demand analysis to
understand behavior in financial markets
 Profit maximization
 Transaction costs and asymmetric
information approach to financial structure

Canadian Pharma Company:
Valeant Pharmaceuticals Intl.

Valeant Pharmaceuticals
International (VRX)
 VRX is a multinational specialty pharmaceutical
company based in Laval, Quebec, Canada.
 CEO: Joseph C. Papa (May 2016–)
 Headquarters: Bridgewater Township, US
 Revenue: 9.674 billion USD (2016)
 Number of employees: 21,500 (2016)
 Founded: 1960
 Total assets: 43.53 billion USD (2016)
 Subsidiaries: Bausch + Lomb, Salix
Pharmaceuticals, et al.

VRX: Product Range
• Valeant develops, manufactures and markets a broad
range of pharmaceutical products primarily in the
areas of dermatology, gastrointestinal disorders, eye
health, neurology and branded generics.
• Valeant owns Bausch & Lomb, one of the largest
manufacturers of contact lenses.

VRX: Medication Line
Xifaxan
Uceris
Arestin
Jublia
Solodyn
Ziana
Acanya
Atralin
Retin-A Micro
Microsphere
Onexton
Elidel
Glumetza
Wellbutrin XL
Isuprel
Xenazine
Nitropress
Cuprimine
Targretin
Zovirax
Syprine

VRX: Business Model
 The nature of Valeant’s business model:
the company would borrow heavily
(mostly as bank loans) to acquire assets
(many with limited lifespans) and raise
prices before generics ate away at market
share
 Reliance more on skilled capital allocation
and execution than other businesses
relevant to pharma sector

M&A Strategy by VRX
CEO Mike Pearson
 Valeant’s private-equity-like approach of
continually acquiring other pharma companies
and then slashing staff and other costs created
a 96 percent gain for its own shareholders in
2013
 “Valeant believes that there is a tremendous
opportunity to increase efficiency, reduce
overspending, and generate long-term
shareholder value in the pharmaceutical
industry by consolidating complementary
operations” (thru M&A strategy)

VRX: Business Growth
• Valeant grew quickly with a series of mergers
and acquisitions under the leadership
of Michael Pearson and for a short period of
time in 2015 was the most valuable company
in Canada.
• Valeant was described as a platform
company that grows by systematically
acquiring other companies.
• For instance, Valeant acquired Salix
Pharmaceuticals for $14.5 billion in 2015.

VRX: Business Growth:
Subsidiaries
1. Bausch & Lomb
2. Salix Pharmaceuticals
3. Medicis Pharmaceutical
4. Solta Medical
5. Dendreon
6. OraPharma
7. Obagi

VRX: Problems Start
• In 2015–2016 the company was involved in a
controversy about drug price hikes and the use of
a specialty pharmacy for the distribution of
its specialty drugs.
• VRX came under criticism by former US Presidential
candidate and senator, Hillary Clinton, and regulatory
scrutiny of its pricing
• Valeant reversed its medication price hikes and ended
cooperation with specialty pharmacy Philidor Rx
Services and then Walgreens took over distribution.

VRX: Financials
Revenue US$9.674 billion (2016)
Operating income -US$0.566 billion (2016)
Net income -US$2.409 billion (2016)
Total assets US$43.529 billion (2016)
]
Total equity US$3.152 billion (2016)

VRX: Rise & Fall
 Having big investor Bill Ackman on board until
early 2017 was a huge win for Valeant and one
of the reasons the pharmaceutical company’s
stock price was able to skyrocket to over $335
per share in 2015.
 Bill Ackman's Pershing Square fund held a
major stake in the company before selling out
in March 2017 for a reported loss of $2.8 bln.
 The company's stock price plummeted nearly
90 percent since the peak.

VRX: Rock Bottom
 Now trading below $15, the out-of-favor
pharmaceutical company has only those
investors who believe that enough value
exists at the current price to justify
waiting a substantial amount of time to
see returns.

Rate of Return for VRX Investors
for last 12 months
Symbol 3-Months 6-Months One-Year
VRX -5.3% -21.3% -45.3%

VRX Latest Earnings Report
 Last week, Valeant Pharmaceuticals
reported earnings that finally surpassed
expectations. Earnings per share came in
at US$1.74, which is a significant step
given that the company lost money for the
same period a year ago.
 While this is good news for shareholders,
it does not mean new investors should run
out to purchase VRX shares.

VRX: Last 1-month Performance:
Toronto Stock Exchange (TSX)

VRX: Latest Snapshot
at TSX, May 15, 2017

Still Revenue Decline
 While the VRX stock increased by more than
35% last week, the company is far from out of
the trouble.
 Reporting revenues of US$2,1 billion for the
quarter, the year-over-year decline is 11%.
 Things continued to go downhill during the first
quarter of 2017 as revenues have decreased,
leading the interest expense to account for
22% of revenues.

Struggling with Big Debt
 Biggest expense for any pharmaceutical
company is the combination of interest
expenses and research and development
(R&D) expenses.
 While the average for most companies is closer
to 15%, the situation at Valeant is worse.
 During fiscal 2016, the interest expenses alone
was 18.9% of revenues, which was an increase
from the previous year’s amount of
approximately 15%.

Selling a Part of Business:
Will Divesting Work?
 The good news for long investors of the VRX
stock is the amount of debt was reduced by
approximately US$1.3 billion
 In the hopes of reducing the interest expense,
VRX agreed to sell its specific products (or
business units) to competitors.
 But the revenue-generating assets will no
longer bring in enough cash to pay off the debt
load, which now totals US $28.5 billion.

So What VRX
Investors Should Do?
 While the company has US$1.2 billion in cash
on the balance sheet, the interest expenses
will simply cost too much to service. The
$28.5 bln debt, which was taken on over the
past five years as mostly bank loans is
crippling Valeant, making it insolvent.
 The question institutional investors of VRX
(58% of all outstanding stocks) need to ask
themselves is whether it is time to cut their
further losses (as Bill Ackman did with $2.8
bln loss) and sell their VRX holdings.

Investing in Pharma Sector: Canadian Case Study (VRX)

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