Valeant Surges After Guidance Boost; Analysts Remain Cautiousby
Debt declines to $28.9 billion as company sells off assets
Sales in drug units under pressure as prices, volumes fall
Valeant Pharmaceuticals International Inc. sounded an upbeat note about its future profits, sending the drugmaker’s beaten down shares surging even as analysts remain wary.
The company said Tuesday its adjusted full-year earnings would be higher than it previously anticipated. Valeant also reported progress in paying down a heavy debt load piled up during a series of deals that built the drugmaker into an industry giant.
Valeant’s stock gained as much as 28 percent, its best intraday performance since November, and was up 25 percent to $12.11 at 1:54 p.m. in New York.
Management said it was able to increase its outlook due to a less severe decline in sales of drugs that have lost patent protection than it had earlier forecast. Adjusted Ebitda this year will be $3.6 billion to $3.75 billion, Valeant said, up from the $3.55 billion to $3.7 billion range projected in February. Ebitda stands for earnings before interest, taxes, depreciation and amortization.
Still, sales trends don’t point to a turnaround just yet. Valeant’s total first-quarter revenue was $2.11 billion, down 11 percent from a year earlier, hitting a low not seen since 2014. And while it paid down some debt, Valeant’s declining earnings mean its overall leverage has increased.
“In reality, Valeant’s sales are declining, its leverage ratio has increased, and we think its pipeline is weak,” Wells Fargo analyst David Maris said in a note, rating the stock a sell.
Sales of Valeant’s biggest product, irritable bowl drug Xifaxan, were $185 million in the quarter, down 26 percent from the fourth quarter, a “notable weak spot” according to JPMorgan analyst Chris Schott.
Executives said Xifaxan fell short of management’s expectations for the quarter, but that a rebuilt sales force should help turn things around. The company has recently added 250 sales representatives after losing some to a new competitor.
“The story here is that we lost some momentum over the fourth quarter of last year and into the first quarter,” Chief Financial Officer Paul Herendeen said on a call with analysts, citing the company’s attempt to sell its gastrointestinal drugs business, which it didn’t ultimately carry out. “Over the last nine weeks, however, our sales forces have regained their footing.”
Valeant’s projection for adjusted profit includes the sale of several businesses, and leaves out the pending divestiture of prostate cancer unit Dendreon, the company said in a statement. Some analysts had expected a cut to guidance. JPMorgan’s Schott said he’s not surprised to see the shares rally given the significant cuts to guidance in the past year.
“That said, we continue to see a long road to recovery for the story,” he said in a note to clients, reiterating his hold rating on the stock.
Chief Executive Officer Joe Papa has promised to get the company back on stable footing after two tumultuous years. Much of Papa’s focus is on boosting cash flows and paying down some of the $30 billion in debt Valeant took on amid an acquisition spree that made the company into what it is today. Its biggest repayment deadline comes in 2020, when $5.81 billion in maturities come due, with another $10.51 billion in the two years after.
“I’ve heard chatter in the markets that Valeant doesn’t have the ability to repay all of its debt,” Herendeen said on the analyst call. “Let me respond. We can meet all of our financial obligations through a combination of cash generation from our business, asset sales and importantly refinancings.”
The goal isn’t to cut Valeant’s debt to zero, but to “maintain a credit profile that will enable us to access the capital markets when necessary,” Herendeen said. “If we take care of our debt, and we will, our equity will take care of itself.”
Valeant said it had $1.21 billion in cash at the end of the first quarter, more than double what it had at the end of the year. It now has $28.9 billion in debt, down from $30.2 billion in the fourth quarter. Still, the company’s leverage has increased, according to Wells Fargo’s Maris, who said total debt to Ebitda is 6.9 times now, up from 6.2 times in the first quarter.