Here’s Why I’m Bullish on VRX Stock
The bets continue on beleaguered biotech stock Valeant Pharmaceuticals International, Inc. (NYSE:VRX) since it became the target of short seller Andrew Left of Citron Research a few weeks ago. Fast forward and we are still without any solid consensus on whether the company is defrauding the investment community. VRX stock is holding up at around $120.00, well up from $88.50 on October 21st. However, the company is subject to news headlines that offers traders insights in one direction or another about this biotech.
Andrew Left is adamant that Valeant is scamming the stock market and the multitude of hedge funds that own the former Wall Street darling. Hedge fund manager Bill Ackman of Pershing Square Capital Management remains committed to the growth thesis behind Valeant stock, which has largely expanded trough aggressive acquisitions versus organic growth care of drug discovery and development.
Why the Biotech Sector is All about Growth
The reality is the biotech sector is always about potential and the next big drug. Major drug players such as Pfizer Inc. (NYSE:PFE) and Merck & Co. Inc. (NYSE:MRK) have significant drug development but also need to find growth through acquisitions.
Newer biotech companies such as Valeant expand via acquisitions. There’s nothing wrong with this business model. The issue of Valeant relates to its revenue recognition in reference with specialty pharmacy company Philidor, which accounts for about six percent of revenues but puts into question its broader accounting practices.
If Valeant is simply careless with its reporting in the case of Philidor but the rest of the business is legitimate, then I would expect the share price to ultimately move higher.
Turkish hedge fund manager Ahmet Okumus has expressed his backing of Valeant, saying there’s an upside of about 35%. (Source: “Turkish Hedge Fund Manager Okumus Is Betting On Valeant Pharmaceuticals International,” Web.com, Lifelock, October 28, 2015.)
Chart courtesy of www.StockCharts.com
With a market-cap plummeting to $43.0 billion, VRX stock could even become a takeover target for the larger biotech companies such as Pfizer, Merck, or Teva Pharmaceutical Industries Limited (NYSE:TEVA) who are all searching to add growth. TEVA is in the process of buying the generic business of Allergan plc (NYSE:AGN).
Pfizer, which is looking for growth, is now considering buying the remainder of Allergan. With a market-cap of $212.0 billion, absorbing Allergen would be a major addition but not a surprise. Pfizer is estimated to see its revenues fall 2.8% this year while Allergan is predicted to see its revenues jump 38.9% this year according to Thomson Financial. This deal would make sense for Pfizer as it would complement its organic business and immediately deliver much stronger growth to Wall Street rather than wait for the release of the next big drug.
So while the debate on Valeant will continue, the stock has become an active target for traders on both sides of the bet. Bet wrong, you lose. Conversely, if Valeant is not hiding anything, this could be one of the best times to pick up shares, but that’s a big “if.” To manage the risk, traders could use Call and Put options to bet.