Investigation is Bad News for Valeant Stock
Valeant Pharmaceuticals International Inc (NYSE:VRX) has started climbing again, and what a climb it was! Valeant stock gained 21.69% after releasing earnings on August 8. Valeant stock has since taken a slight—but we expect temporary—beating over legal issues lingering from the previous administration. But it’s still trading over 18% higher than just a month ago.
Valeant said it’s cooperating with U.S. authorities following the publication of an article claiming that the company is under criminal investigation in New York over allegations it had ties with a mail order pharmacy with a reputation for fraudulent activity. Valeant stock has lost 10.36% after the news.
But Valeant shares are still trading at $24.50 or so, still higher than the $22.44 it was trading at on August 9. Valeant has not commented on the investigation. The prosecutor’s office for the Southern District of New York is investigating whether Valeant has engaged in fraud against insurers, hiding its ties to Philidor Rx Services, which ceased operating. (Source: “Valeant Under Criminal Investigation,” The Wall Street Journal, August 10, 2016.)
Will the Investigation Hurt Valeant Stock?
Investors have a few assurances that the investigation will affect Valeant stock in the short term, but it will not compromise the favorable guidance that led to VRX stock’s big jump this week. The links between Valeant and Philidor emerged last October. It should be stressed that:
- Valeant and Philidor have no ties. Moreover, since last October, Valeant has a new President and CEO, Joseph Papa.
- Papa said that he would seek a name change for Valeant if the reputation associated with its current brand interfered with its turnaround plan and with Valeant stock’s performance.
Valeant has accumulated a whole suite of controversies since last year. In addition to a U.S. Securities and Exchange Commission (SEC) investigation, Valeant fell into the U.S. Congress’s viewfinder because of steep increases in the price of certain drugs. Now, the past has come to haunt Valeant as it focuses on debt reduction. Still, while the controversy is a risk for Valeant shareholders, Moody’s, the rating agency, praised the debt reduction plan, which is by far the most important item on Valeant’s agenda. (Source: “Would Valeant Pharmaceuticals (VRX) Succeed in Lowering its Debt?,” The Country Caller, August 11, 2016.)
Here’s Why I’m Bullish on Valeant Stock
Valeant is selling assets and has also asked its lenders to make it easier to pay back its debt. To that effect, the next big date for Valeant stock will be on August 17. That’s when the lenders will respond to Valeant’s request for a more favorable “interest ration agreement.” (Source: Ibid.)
The drugmaker also wants some changes regarding its asset sales. For this, the company is willing to increase the interest rate by 50 basis points for its lenders, and has also agreed to pay an amendment fee of 25 basis points. The lenders have until August 17, fiscal year 2016 (FY16) to decide if they agree with these proposed changes.
Moreover, about three weeks ago, Valeant’s anti-constipation drug Relistor was approved by the U.S. Food and Drug Administration (FDA). This is quite literally a potential blockbuster, and not just against constipation. Bloomberg reports that the drug has attracted many potential buyers, but given its sales potential, Valeant will likely keep it. (Source: Valeant’s newly expanded Relistor franchise draws interest from potential buyers, FiercePharma, August 8, 2016.)
Shares of Valeant rebounded sharply on August 9, after the company confirmed that its revenue forecast for the year—already lowered—remains the same. That prompted sighs of relief from VRX shareholders, who feared that Valeant would have to lower these again. Indeed, VRX stock gained over 25% on the Toronto Stock Exchange.
Yet, Valeant posted a net loss for the second quarter of $302.0 million, six times higher than a year earlier. It seems that shareholders were already aware of this eventuality. After all, VRX stock is still trading well below its 52-week peak of over $250.00, reached exactly a year ago.
The Bottom Line on Valeant Stock
Valeant, criminal investigation or not, is focusing on reorganizing its business portfolio. The company wants to put the period marked by criticism against its business methods behind. The company is facing a massive debt burden but has a plan to confront it. It has assets, non-core-business-related, that it can sell, and it has some potential blockbusters in its portfolio. That means Valeant stock has much more upside left.
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