A Potential Valeant Pharmaceuticals (NYSE:VRX) Catalyst in the Making

- August 20, 2017

Valeant Pharmaceuticals (NYSE:VRX) has done a decent job at selling its debt reduction plan and progress to VRX stock owners over the last few months. Valeant has reduced debt by more than $4.8 billion since the first of last year, and managed to rid itself of the profit draining Dendreon asset for many times more than its worth.

While Valeant’s debt has fallen below $28.5 billion and its cash pile has risen, its debt to asset ratio over 68% is about as high as its ever been. Valeant stock has bounced more than 70% off its low, but there’s a good chance the company’s debt to asset could become a problem down the road.

We don’t view it as a problem right now. No, we don’t like the long-term danger it presents. However, we also realize that less debt equals lower interest payments.

Fact is there’s only one business of Valeant that really matters, and it is not what any of the experts think. As seen in the chart above, Valeant’s branded Rx business has consistently generated significantly greater profits by itself than the entirety of all Valeant businesses.

Last year Valeant’s branded Rx business generated $1.7 billion in operating income, and already $667 million this year. If Valeant Pharmaceuticals (NYSE:VRX) could divest the rest of its junk, the Branded Rx business could reduce debt and create significant shareholder value by itself.

A multiple of just 15 on last year’s Branded Rx operating income would support a valuation that’s 5x greater than VRX stock’s current price. Best of all, Branded Rx amounts to less than 30% of the company’s total revenue.

A VRX stock catalyst in the making

Therein lies a potential catalyst in the making: Valeant to divest more business units and consequently lower its debt and boost its margins as Branded Rx becomes a bigger piece of the pie.

Valeant Pharmaceuticals (NYSE:VRX) reportedly attempted to sell its B&L and Salix units last year. Many think the company could fetch upwards of $15 billion for the combined units, but no one thinks Valeant would divest both.

At the time of those rumors, B&L revenue was falling as a percent of the total, and Salix has continued to dwindle. Both businesses performed very well during Valeant’s last quarter, as seen in the chart above that illustrates each segment’s respective weight of total revenue (quarter to quarter) for Valeant Pharmaceuticals.

With a 13% increase in Salix revenue last quarter, the time is now to sell the unit. Valeant can pitch that the bleeding has slowed in the division. Meanwhile, B&L is a huge piece of the Valeant pie, but ineffective and less valuable to the bottom line than Wall St believes.

If Valeant Pharmaceuticals will use this newfound momentum to divest these assets, and thereby take a big bite out of its debt, substantial shareholder value for Valeant stock owners would pursue.

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