Valeant CEO tries to paint happy face on 4Q results; markets not buying the turnaround–yet?

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The News:

Valeant Pharmaceuticals International Inc.’s (Laval Quebec) fourth-quarter loss widened to $515 million versus $385 million in the same period of 2015, as sales plummeted 13% year-over-year to $2.4 billion, the company reported (on top of a dismal third-quarter). Valeant noted that the drop in revenue was mainly due to a reduction in product sales from the existing business of $310 million. The drugmaker’s shares fell 14% on the news.

@Valeant 4th-quarter loss widened to $515 million versus $385 million in the same period of 2015 Click To Tweet

Valeant added that quarterly sales in its Bausch & Lomb segment fell 1% to $1.2 billion, while revenue from its branded prescription drug unit tumbled 17% to $829 million.

CEO Joseph Papa said the financial results “delivered on expectations,” noting that “over the past few months, our teams worked to stabilize and strengthen our core businesses, resolve legacy issues, improve operational processes, launch new products, and improve the balance sheet and capital structure.”

Papa, who became Valeant’s CEO in May last year, has pledged to eliminate non-core assets to reduce debt, FirstWord Pharma points out. In January, the Canadian drugmaker reached an agreement to sell all outstanding equity interests in its Dendreon cancer business to Sanpower Group for $820 million. Meanwhile, talks to divest its Salix Pharmaceuticals unit to Takeda collapsed last November reportedly due to disagreements over price.

The company attributed the slump in sales in its branded prescription drug unit to decreased revenue for its Salix and dermatology business, in addition to lower average pricing and generic competition. Meanwhile, the drugmaker generated $398 million in revenue for its US diversified products segment, down 30% from $568 million in the fourth quarter of last year.

For 2017, Valeant said that sales are expected to be in the range of $8.9 billion to $9.1 billion, with earnings between $3.55 billion and $3.7 billion. Analysts anticipate full-year revenue of about $9 billion, with earnings of $3.9 billion.

Commenting on the news, Mizuho analyst Irina Koffler stated “it still doesn’t appear that management has a realistic outlook on its organic growth.”

Steve’s Take:

Normally, when a stock beats earnings estimates, Wall Street cheers and the stock goes up—even if slightly. But that sure didn’t happen with Valeant Pharmaceuticals. The company reported adjusted earnings of $1.26 per share that beat Wall Street’s expectations of $1.24 a share.

Instead, the stock dropped immediately when the earnings beat hit the wires, shedding around 6% in premarket trading. It’s now down around 14%.

Why isn’t Wall Street doing its traditional happy jig?

Business Insider reminds us that in the summer of 2015, Valeant’s stock was soaring around $267 and had the full faith and support of one of Wall Street’s titans, the hedge fund billionaire Bill Ackman.

In a few short months, though, accusations of accounting malfeasance and scrutiny from the federal government of its drug pricing practices virtually destroyed the company. Its stock is now hovering around $14. Talk about remembered pain.

2016 was a roller coaster of more federal investigations, a new CEO, congressional hearings, and nationwide anger over Valeant’s drug-price hikes. All the while, the company was still holding $30 billion in debt and a product line that had expanded through acquisitions it no longer had the cash to continue.

Ackman, however, kept his faith in the company and encouraged Wall Street to do the same.

But it doesn’t seem to be working. Quarter after quarter, executives said they were turning the corner to a “new Valeant.” Quarter after quarter, the “new Valeant” was pushed back later and later. Now, based on the company’s most recent call, it seems it won’t arrive until around mid-2018.

In fairness, Valeant’s executives did their darndest to point out the positives in the company’s fourth-quarter earnings, including modest revenue gains in its Bausch & Lomb eye segment and progress made in its plan to pay down debt and shed underperforming businesses. But they couldn’t hide from the dismal picture painted by the numbers: Valeant’s revenue fell 13% year-over-year to $2.4 billion, and its net loss skyrocketed 34% to $515 million ($1.47 per share).

Considering that year-over-year comparisons were horrific in last year’s fourth quarter, it’s no surprise analysts are predicting that Valeant is in for another difficult year, says FiercePharma.

“We think Valeant’s 2017 might be similar to its 2016,” wrote Wells Fargo analysts in a note to investors that they titled “Deja Valeant.” The note detailed a laundry list of problems the company faces, including patent expirations, weak prescription trends, deteriorating cash flow and “numerous lawsuits” that include an insider trading case.

Compounding the gloom, Valeant’s 2017 guidance didn’t do much to ease investors’ concerns. The company said it expected revenue to come in between $8.90 billion and $9.10 billion, down from $9.67 billion in 2016. It said to expect non-GAAP earnings of $3.55 billion to $3.7 billion, down from $4.3 billion. Valeant’s shares dropped nearly 10% to $15.12 in early morning trading.

Valeant is counting on some key product launches to propel revenue growth in the next few years, including Siliq, its psoriasis treatment that was approved by the FDA earlier last month. But the sales launch will be daunting: The FDA required a black-box warning on the product indicating a suicide risk, forcing Valeant to market the drug with a prominent, comprehensive risk-management program in place.

During the earnings call, Valeant executives cited future product launches as one reason to be optimistic, but Valeant has already suffered some missteps there. Last year, it got the dreaded complete response letter from the FDA on its eye drug Vesneo (latanoprostene bunod), citing questions about manufacturing quality. The company resubmitted its application to the FDA yesterday. CEO Joe Papa conceded during the call that any gains from product launches in 2017 would not come until the back half of the year.

The earnings call ended with a question about a simmering topic on everyone’s mind: the company’s sapping debt load. Investors have been pushing Valeant to refinance its debt, raising tough questions about whether it has sufficient liquidity to meet its repayment obligations, long term.

CFO Paul Herendeen didn’t provide details about the company’s long-term plan, offering only this somber assessment: “We look at the situation in the financial markets and the debt markets every day with great urgency. I look at all the towers of our debt.”

Valeant expects around $1.9 billion in proceeds from already announced divestitures. But the prospects seem slim of generating enough cash to give itself enough room to maneuver.

Valeant can’t be the New Valeant until this dynamic changes for the better, and it’s still unclear how that will occur.

Bottom line:

Valeant has seen its stock price fall more than 90% from its all-time high and could be an excellent turnaround opportunity.

Papa, Valeant’s indomitable CEO, likes to refer to his company as the “turnaround opportunity of a lifetime.” He could be vindicated, but there are miles to go.

Again, simmering beneath all the things that could go right, the biggest problem for Valeant remains its crushing debt load. The company is making at least some progress on this front. In January, Valeant sold Dendreon to Sanpower Group and three skincare brands to L’Oreal. The two deals combined generated roughly $2.1 billion that is being used to pay down debt.

That’s not enough, though, says Keith Speights for Motley Fool. Papa committed to reducing Valeant’s debt by $5 billion by early 2018. While Valeant still has plenty of brands it can sell off, they might prove to be more challenging to generate the kind of cash Papa imagines.

Yes, Papa might be successful in reducing Valeant’s debt and improving earnings, but I agree with Speights that investors would be better served adopting a wait-and-see, “show me the money” approach.
In closing, Adam Sarhan over at Forbes posits three “timeless lessons every investor can learn from Valeant Pharmaceuticals’ crash that are timed to perfection for this latest earnings call and what it portends going forward.

1: Don’t Fight the Tape.

For the past few years, the stock was a huge winner and several large well-known hedge fund managers made a killing as they piled in and watched the stock soar. Then, Valeant topped out at $263.81 in Aug 2015 and has plunged a whopping $228.71 or nearly 87% to its current price of $35.10. Every great stock in history eventually needs to be sold. Investors who fight the tape are begging for a beating.

2: Respect Risk.

The second lesson is to respect risk. Every major loss in Wall Street’s history could have been avoided if the investor respected risk. If you win more than you lose, you will be around for a very long time. Lehman Brothers would not have failed had they followed this one simple rule. This doesn’t mean that asset prices won’t decline. The point is that companies and entire portfolios would not have been annihilated during those inevitable declines.

3: Date, don’t marry, your positions. (Personally, I love this metaphor, having often violated its message and paid the price.)

Successful investors know that being flexible is important to being successful on Wall Street. When the “facts” change, it is important that you change your stance and adjust accordingly. Ego is everyone on Wall Street’s biggest enemy and falling in love with one’s investments, even when losing money, is a common mistake so many people (both professional and individual) make.

Admitting you are wrong (the sooner the better) is very difficult, Sarhan notes. Yet, it is a necessary trait to being successful. After Valeant’s earnings call, the company is poised to test all of the above precepts of investing. Pull the trigger either way, or wait.

Last night, President Trump gave his first address to a joint session of Congress. Earlier in the day a good friend said he was selling a big block of his stock portfolio because word was the President’s messages were going to cause a massive selloff in a market at record highs. In other words, a perhaps long-overdue correction was coming, and Trump’s speech would be the trigger.

Today, markets are all up significantly. I didn’t act on my friend’s suggestion, mostly because I was busy writing this piece.

Steve's Take: @Valeant proves winning on #WallStreet isn't for the feint-hearted Click To Tweet

What does this prove? Only that Sarhan is correct: trying to win on Wall Street isn’t for the feint-hearted. When in doubt, stay calm and trust your instincts. Unless you simply cannot afford to be proven wrong and be annihilated when the market is at new tops.

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