How Valeant Pharmaceuticals can unlock 300% gains in VRX stock

- May 16, 2017

After two years of loss, VRX stock has finally found some buying pressure over the last few weeks. In the last month, Valeant stock is higher by 50%, but is still down 45% in the last year. Nonetheless, Valeant Pharmaceuticals (NYSE:VRX) is finally making progress that bulls and bears alike can acknowledge.

However, the company still has a long ways to go, and unless it makes specific moves, VRX stock owners should not expect lavish returns in the near future. Fortunately, there are two moves that Valeant Pharmaceuticals (NYSE:VRX) management could make, that would consequently unlock upside between 200% and 300%.

One look at Valeant’s total liabilities and you see that the company has a long road ahead. And what’s worse, these $38 billion in liabilities do not count additional monies that will likely be owed from lawsuits.

While Valeant Pharmaceuticals (NYSE:VRX) has made progress in paying down debt, $5 billion in liability reduction, the company still has a long ways to go. After all, it took Valeant Pharmaceuticals (NYSE:VRX) many years to get into this mess with overpriced acquisitions. It will take just as long to divest those assets and get out of its mess.

If Valeant divests the right assets, mainly Salix and Bausch & Lomb, it could take a huge chunk from its liabilities while maintaining the profits to pay down debt and create VRX stock value.

As seen in the chart above, Valeant’s only stable business with consistent operating profits is its Branded RX business.

While this segment doesn’t have the appeal of Salix or Bausch & Lomb, its profits make Branded Rx the most valuable unit to VRX stock long-term. The unit will produce at least $1.5 billion in operating profit this year, with room to grow beyond 2017.

Branded Rx is responsible for well over 100% of Valeant’s total operating profit. However, as seen below, it is less than 30% of the company’s $2.1 billion in last quarter revenue.

 

Say what you want about Valeant Pharmaceuticals (NYSE:VRX) management, the one thing they know how to do is move assets. This group just recently got $820 million for a bankrupt Dendreon whose sole drug Provenge had never been close to profitable. When Dendreon was public, the company lost $2 for every $1 it made in revenue.

That said, if Valeant can get $820 million for Dendreon, I have to believe it could generate real interest for Salix and Bausch & Lomb.

Just last year, reports surfaced that Valeant Pharmaceuticals (NYSE:VRX) was close to selling Salix to Takeda for $10 billion, but the deal ultimately fell apart. In regards to B&L, this has always been an attractive target “if” Valeant was willing to sell it.

Yes, B&L is large and profitable, but does not produce the margins of its Branded Rx. Analysts believe Valeant Pharmaceuticals (NYSE:VRX) could get $7 to $8 billion for B&L, maybe $10 billion. That would do wonders in paying down debt.

All things considered, if Valeant Pharmaceuticals (NYSE:VRX) would sell both its B&L and Salix units, the company could very well get $15 billion or more. Valeant Pharmaceuticals (NYSE:VRX) could get its liabilities very close to $20 billion. Then all of a sudden, Valeant has a business with $1.5 billion in operating profit to pay down $20 billion in liabilities over time. Its credit rating would improve, and if it chose to implement another acquisition strategy not focused on drug price hikes, it would have the flexibility to do so.

In my opinion, Wall Street would then give VRX stock a fair value based on its Branded Rx business. A multiple of 15 on $1.5 billion in operating income gets Valeant Pharmaceuticals (NYSE:VRX) to a valuation over $20 billion. That would be upside of 300% by divesting B&L and Salix and then paying down debt with a highly profitable business remaining.

Even with a multiple of 10, Valeant stock supports a valuation of $15 billion. That’s upside of 200%! Regardless, the solution to unlock large upside in VRX stock is divesting assets.

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