VRX Stock May Face Bumpy Road, but Outlook is Bullish
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has gained almost 14% this week on the New York Stock Exchange. One of the factors contributing to the bullish sentiment over Valeant stock came from Morgan Stanley, which gave it an “overweight” recommendation and a price target boost from $33.00 to $42.00. The case for investing in Valeant is clear.
Valeant stock has some risks, and the risk of legal problems popping up over its previous association with the now discredited Philidor Rx Services. But the upward, or bullish if you will, potential is more attractive than Valeant is risky. This company has a simple but effective strategy for recovery, focused on reducing its debt while continuing to pursue new potential blockbuster drugs. Besides, the pharmaceuticals company can always rely on the sale of valuable assets to improve its position if necessary.
The key point about Valeant stock is that its major risk, which threatened the very survival of the company until just a few months ago, has softened. The risk is now manageable. The ongoing renegotiation of its debt with banks has averted a critical situation from slipping over into the realm of Shakespearean drama. As the company continues to honor its debt, VRX stock’s valuation will continue to improve.
Valeant Will Face More Legal Challenges
Former major investors will certainly put some speed bumps along the path to recovery, but they will be temporary and surmountable. Indeed, it did not take long for Valeant to find a speed bump putting pressure on its shares, even as it still shows strong gains for the past week. T. Rowe Price Group Inc, a mutual fund, and a former major Valeant Pharmaceutical shareholder, is suing the company’s former CEO Michael Pearson as well as other former and some current executives in New Jersey. (Source: “Valeant Pharmaceuticals International Inc sued for fraud by T. Rowe Price Group,” Financial Post, August18, 2016.)
The plaintiff has accused the company of having adopted a “fraudulent business model” that allegedly has cost investors billions of dollars. The situation is not new. Others have also accused the company of allegedly practicing deceptive pricing and questionable accounting policies. T. Rowe sold a majority of its Valeant stock last May and now it seeks compensation.
Nobody should panic over this latest lawsuit. By all means worry, but don’t despair. As noted above, the company will meet a few of these ghosts from the past, dressed up in legal clothes, as it continues its recovery plan. Valeant, which may also face criminal charges, is fully committed to reorganizing its business.
Valeant Pharmaceuticals, with its new CEO Joe Papa (an outsider when it comes to any of the accusations the company is facing), may eventually change its name if the reputation associated with its current brand interferes with its turnaround plan. (Source: “New Valeant CEO continues his executive shakeup,” The Globe and Mail, August 8, 2016.) Papa is simply taking it in stride, pushing ahead because the company he now manages has already made progress.
The Laval, Quebec-based company has already changed long-term agreements with such major customers as Walgreens and has enhanced its dermatological and gastrointestinal activities—it owns valuable brands such as “Jublia” and “Relistor”—while it pays down its debt. It wants to reorganize its operations into three segments. This includes the option of selling up to $8.0 billion of assets that it considers non-essential—such as the Egypt-based Amoun Pharmaceutical Company S.A.E, acquired in 2015, at the peak of its Wall Street popularity. (Source: “Valeant Said to Consider Sale of Egyptian Drugmaker Amoun,” Bloomberg, June 10, 2016.)
The Bottom Line on VRX Stock
Papa said he would cut about $10.0 billion in debt over the next few years. Papa knows that Valeant stock is not likely to get an “investment grade” rating in the short term, but he is determined to get VRX back to profitability. The company is investing in drug development while cutting administrative costs. In the most recent quarter, it was in the red, but analysts and investors alike appreciated that the company’s pharmaceutical business cash flow increased by nine percent.
The bottom line with Valeant stock is that those who are willing to put in the kind of patience that Joe Papa is showing in rebuilding the brand could see some rewards.