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Stock Analyst Update

Valeant's Not Out of the Woods Yet

Although first-quarter results showed positive signs, debt remains a significant concern.

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 Valeant (VRX) reported encouraging first-quarter results with organic growth up 2% when excluding the large effect of divested assets on the reported 5% decline in sales. Management slightly raised its year-end revenue and adjusted EBITDA guidance. Management’s new EBITDA outlook of between $3.15 billion and $3.3 billion exceeds our forecast, and we’ll likely modestly raise our fair value estimate as the company’s performance has surpassed our initial expectations. While stabilizing underlying growth, new products on the horizon, and resolution of some legal liabilities create reasons for optimism about the company’s turnaround, we caution that the company’s path forward remains challenging thanks to competition on existing products, a high uncertainty around the potential success of recent launches, and ongoing high financial leverage. While we applaud management’s debt reduction efforts, net debt to adjusted EBITDA still sits at an uncomfortably high level of approximately 7.1.

Management also announced it will change its name to Bausch Health Company and trade under the ticker BHC. The name change might help alleviate stigma with potential investors due to Valeant’s troubled past, but management’s current turnaround strategy will stay in place. Unrelated to the name change, we note that management’s ability to stabilize the business could increase the odds of better terms for asset sales, particularly in segments with the best prospects, such as ophthalmology, gastrointestinal, and even dermatology if a number of the firm’s new products and pipeline candidates, like Siliq (launched in 2017) and Duobrii (June PDUFA date) for psoriasis, work out.

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Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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