Hopes for Valeant Are Fading
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is no longer an investable asset, but is instead a trading vehicle for short sellers and those who think new CEO Joseph C. Papa can put VRX stock back on Wall Street’s radar.
Perhaps the new year can bring new fortunes for VRX stock. Maybe it will, or maybe it won’t, but I wouldn’t be running to pick up shares of this flea-ridden biotech company unless you can stomach intense volatility and downside risk.
Valeant stock was trading at $29.24 when I last talked about the company in May 2016. I was bearish then, and at a much higher price than Valeant stock is at today. VRX stock is now trading at the $15.00 level, nearly half the May price.
Chart courtesy of StockCharts.com
If you are one of the many investors who lost capital by trading the long side on VRX stock, you would likely be even more frustrated to know that controversial former-CEO Michael Pearson made an astounding $140.0 million or so in 2016, mainly via options.
The reality is that the balance sheet is vulnerable to default, and there is a trust issue with Valeant Pharmaceuticals Intl Inc.
I’m seeing increased call option activity on VRX stock as traders bet that Papa can liquidate some of its more lucrative assets and cut its massive debt load of $31.0 billion in order to extend the company’s life.
VRX stock traded as low as $13.00 on December 15, 2016, which can be used as a technical gauge on the potential downside risk.
While traders can trade in and out on Valeant stock with options or the underlying stock, make no mistake about it: Papa has his hands full. Unless he can inject some cash into the bare coffers, I don’t see a future for VRX stock.
Why Selling Key Assets Is Only Option for VRX Stock
Of course, there are those who would argue against my view and think Valeant Pharmaceuticals Intl Inc, Inc. still has great assets in its business.
I’m not going to argue this, as there are some great assets on the company’s books. The problem is that Valeant Pharmaceuticals Intl Inc will be required to divest some of the best assets in order to save itself from the debt vultures.
The company is speculated to be in deep discussions to sell its lucrative Salix Pharmaceuticals, Ltd. (NASDAQ:SLXP) unit to Takeda Pharmaceutical Co Ltd (TYO:4502). The maker of gastrointestinal drugs was purchased for $11.1 billion in 2015. While it’s not known what the bid price will be, I do not think that Valeant Pharmaceuticals International, Inc. will have the ability to play hardball with the price.
Valeant Pharmaceuticals Intl Inc needs the money or face the reality it cannot continue to hold $31.0 billion in debt on its balance sheet.
There is also the Bausch + Lomb unit, which could generate billions of dollars in much-needed capital.
While there is mounting risk for VRX stock, the only certainty is that Papa will have to divest some of its most lucrative assets this year in order to survive and perhaps regroup.
Papa is under intense pressure to salvage the company for institutional investors like Bill Ackman of Pershing Square Capital Management (part of Pershing Square Holdings Ltd (AMS:PSH)), the biggest shareholder in VRX stock.
Of course, Papa also has his own interests on hand, as he can receive $500.0 million in bonuses if he can drive VRX stock back to its high at above $260.00.
All I can say is good luck, you’ll need it.