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The Case For Going Long: Valeant
Nov. 18, 2015 11:52 AM ET |
78 comments | About:
Valeant Pharmaceuticals International, Inc. (VRX) by: Diego Salas
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
(More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
http://seekingalpha.com/article/369...b4pen7:6a2015dfc4559fb402570eaab0d47e3e&dr=1#http://seekingalpha.com/article/369...b4pen7:6a2015dfc4559fb402570eaab0d47e3e&dr=1#http://seekingalpha.com/article/369...b4pen7:6a2015dfc4559fb402570eaab0d47e3e&dr=1#http://seekingalpha.com/article/369...b4pen7:6a2015dfc4559fb402570eaab0d47e3e&dr=1#
Summary
We summarize 4 reasons to invest in VRX.
VESNEO, a new drug thought to be critical to managing glaucoma and ocular hypertension, is expected to provide VRX $500 million in the U.S. and $1 billion globally.
Addyi is just in its early stage; nevertheless, it is projected to be one of VRX's prime products by the end of 2017.
We analyze both VRX's and the industry threats as well as the backdrop of the company’s performance in recent days because of investigations and lawsuits concerning the overpricing of drugs.
(Editor's Note: This article was submitted in November as an entry in the Northeastern University Seeking Alpha Stock-pitching competition held on November 9th, 2015).
By Diego Salas and
Carlos Elias Campos
When considering the long-term profitability of a stock, it is important not just to focus on the short-term performance of the firm, but also to analyze the different products and the maturity of those products in terms of price, reliability, reach to the public, and percentage of relevance to the firm´s revenue.
Valeant Pharmaceuticals International, Inc. (NYSE:
VRX) is a publicly traded multinational company based in Laval, Quebec, Canada that specializes in taking to market numerous neurological, dermatological, and anti-infectious products. It is the biggest publicly traded Canadian company. However, the firm has encountered
issues in the third quarter of 2015 as a result of drug pricing controversies as well as an ongoing investigation into the Firm's association with
Philidor.
Valeant's stock price has been negatively impacted by the noise created by
recent news regarding unsupported increases in certain products in association with Philidor. It has produced uncertainty in the media, which has driven investors away from the security. Naturally, a stock with negative news is seen as risky and weak by the risk-averse investor. However, it is really a value-stock -at this point- because you can buy it at a discount. Sure, there are many unknown, unpredictable factors that may drive people's opinions to sell the stock but unpredictability is only valid in the short-term because, long-term, risky headlines tend to disappear and profits tend to be maximized.
Far more severe scandals have not sunk other large corporations either. We can easily compare Valeant's situation with Pfizer and the
Bextra scandal in 2005, which had a negative impact on both firms, but did not create a long-term effect on the stock price since
the number of Viagra prescriptions has been increasing more than 70% since 2004, which made Pfizer more profitable as result of its financial growth in real terms. Something similar is expected to happen with Valeant considering its recent acquisition of
Sprout Pharmaceuticals, which is the maker of female Viagra. This new product was introduced 2 years ago and was approved by the FDA in October, under the brand name
Addyi. In the U.S alone, it will boost the revenue generated by Valeant tremendously, increasing the Firm's market capitalization over time. The importance of acquiring Sprout Pharmaceuticals is due to the exclusivity that Valeant will enjoy by owning the patent to produce Addyi, which, as mentioned before, is expected to have a great market performance in late 2016 when prescriptions are estimated to peak. If expectations were to be met, sales of Addyi would increase dramatically and VRX's overall revenue would spike dramatically. It is true that current Addyi sales seem to be stagnant; nevertheless, it is important to consider that
Addyi posology is not Viagra's; therefore it requires more time for doctors and patients to normalize the consumption of the product. That being said, the expectations for Addyi should remain positive considering that the complexity of the product gives Valeant a head start on libido related female formulas.
Financial Snapshot
Despite huge liabilities in the form of debt, VRX has
strong year-over-year growth. The firm's free cash flow, which is the money remaining after accounting for investments required to expand and maintain a company's assets, has also been on a growth trajectory since 2006.
Trailing twelve months' revenue is at the highest in company history and
VRX's 3-year revenue growth (49.7%) exceeds the industry average (17.7%) by almost triple. Finally, company earnings per share in Q3, 2015 still exceeded that of VRX in early 2014, when the stock price was trading between $120 and $130 (Yahoo Finance).
According to
Michael Waterhouse of Morningstar:
[W]e think new product launches and improving cash flow in 2016 should begin to clean up the company's financial position as long as the 7% of sales affected by specialty pharmacies doesn't lead to further issues in the remainder of the business."
We proceed to utilize the
estimated earnings per share in E2016 ($14.81) times a 7.77 valuation multiple that we derived from the consensus E2015 price-earnings ratio, which is expected to be 6.26 ($70.32/11.23), relative to what the consensus estimated earnings per share will be in E2016 (14.81). This allows us to tag VRX's per share fair value to $115.15 at the end of the 2016 fiscal year. We utilize this valuation method instead of the discounted cash flow model because this
method is more effective for stocks that feature uncertainty as well as market sentiment.
This stock ultimately plays out very well for medium to low risk investors that are interested in very high rewards and who are interested in the healthcare/pharmaceuticals industry that believe in the products the company is launching. This situation creates a discounted opportunity to acquire the stock in what is considered the minimum of the business cycle performance of the firm.
Project Pipeline
The company's project pipeline and contributions to the industry are in the form of introducing: six ophthalmologic products, two dermatology products, one allergenic product, and one oral health product between 2016 and 2019,
all of which are already in late-stage development and are expected to be introduced in early 2016. VESNEO, a new drug thought to be critical to managing glaucoma and ocular hypertension, is expected to earn $500 million in the U.S. and $1 billion globally next year for VRX. All of this, in addition to the already positive and increasing demand of Addyi, which is projected not just to represent a new product, but a new medical tendency as Viagra did in the late 90's. It is important to consider factors that are true and also binding for this last product performance in the market, such as demographics and posology.
Addyi is just in its early stage; nevertheless, it is also projected to be one of Valeant's prime products by the end of 2017.
