Valeant - 2018 To 2025 ForecastValeant - 2018 To 2025 Forecast Nov. 16, 2017 3:13 PM ET Peter Tan Long only, hedge fund manager Summary By 2025, Valeant should be able to clear most debts. By 2022, Valeant should be meeting CFO Herendeen's target of 5x leverage. Valeant is aggressively minimizing its senior secured credit and may require to issue 1 more senior secured notes in 2025 to cover senior secured credit for 2023. As we all know, Valeant (VRX) has debt problem and currently, it is around $27.1 billion. There are endless debates on whether Valeant is still solvent, thus I did a 8 years forecast (up to 2025) and the results were surprisingly positive. Here is what I have done: I have pulled the debt stacks from recent 10-Q filing (Filing Date: 11/07/17, XLS, table 13) and sort the stacks into years (2018 to 2025). I have calculated the annual interests for Senior Secured Credits ("SSC"), Senior Secured Notes ("SSN") and Senior Unsecured Notes ("SSN"), which will result in yearly interests payment. For simplicity sake, I discarded the idea of researching the number of interest payments for when that debt is being redeemed, and presume a full-year of interest. Now that we know the annual interests for each year, I would then forecast EBITDA for that 8 years, based on 2017 EBITDA guidance (Earning Call Slide, Slide 18/73) of $3.60 - $3.75 billion. There will be 3 scenarios - 1) $3.6 billion at 5% annual growth, 2) $3.75 billion at 5% annual growth, and 3) $3.6 billion at 0% annual growth. For the first 2 scenarios, I have chosen a conservative growth of 5% due to the current indicators that Bausch + Lomb and Salix are experiencing +6% growth and that these 2 brands are contribute a significant portion of Valeant's bottom line. Do note that I have left out factors like the LOEs and Vyzultas (or any new drugs) due to the complexity in knowing market performance. I have assumed that Valeant would use whatever cash and profit into paying the interests and redeeming the debt stack for that particular year. I have also included the recent liquid position of $1.97 billion (Earning Call Slide, Slide 15/73). However, I did not factor in that CFO Paul Herendeen's stand that Valeant might not redeem all of its debt during recent Cantor Fitzgerald conference. For simplicity's sake, I did not factor in the possibilities of any acquisition, divestiture, legal penalty if any, etc as well. Lastly, I have also include the debt/ebitda leverage for reference. During that Cantor Fitzgerald conference, Paul Herendeen has mentioned that he hopes that Valeant meet the ideal leverage of 5x. How Much Debt Per Year In the recent Earning Call Slides (Slide 16/73), it shows that proforma long-term debt maturities profile. However, there are 2 problems with that format: No interests rates indications Not categorized into SSC, SSN, and SUN. Thus, the following table would contains debt stacks, sorted by years, with inclusion of interests rates and categorization. Source: Author We can see that the total debt is $27.127 billion. Do note that in this table, I have left out the interests rates for 2020 SSC due to lack of data. How Much Interests Per Year For months, there have been grouses on Valeant's massive debt and its accompany billion-dollar interests. I am not surprised that Valeant's share price has been negatively affected by this perception of "enormous interest payment that will lead Valeant to bankruptcy." Based on official earning reports, Valeant is paying $1.5 billion worth of interest and investors balked at this massive "loss of profits". Yet, we often forget that in the future, Valeant will redeem those notes and annual interests will drop accordingly. Here is the interests table to show how much will be the annual interests, from 2018 to 2025. Source: Author From this analysis, we can see that for 8 years: Total interests is approximately $8 billion. Total EBITDA is approximately $34.4 billion. Interests will start to fall from 2021 onwards. Most importantly, we can see a certain pattern here. It would seems that if Valeant play their cards correctly, they are able to conquer 1 debt stack at a time, provided that have adequate cash reserve beforehand. From now till 2020, Valeant would have $8.818 billion ($6.349 billion + $2.469 billion). This is more than enough to clear 2020 debt stack of $5.337 billion. Also, 2021 debt stack of $3.157 can be cleared by 2020 cash reserve and 2021 FCF. However, we see that in 2022 and 2023, there are not enough cash reserve and FCF. As for 2022, the issue is minor so we are not going to pay too much attention to it. As for 2023, it is quite a major debt stack of $5.973 billion: 5.50% March SUN 5.88% May SUN 4.50% May SUN (Euro-denominated) But if we calculate the FCF and Debt Stacks for 2023 and 2024, there are more cash-flow than debt stacks, thus I believe Paul Herendeen will work with bankers to sort this out. How Much Debt Is Left At End 2025 Based on the previous analysis, it shows that Valeant would have an accumulated interests will be $8 billion, accumulated EBITDA will be $34.4 billion, 2017 cash reserve of $2 billion, and a debt of $27.1 billion. So how much debt is left at end 2025? Let's calculate: Debt + Accumulated Interests - Cash Reserve - Accumulated EBITDA $27.1 billion + $8 billion - $2 billion - $34.4 billion = -$1.3 billion Yes, Valeant would be out of debt and end up with $1.3 billion of cash reserve. Yes, no more nasty debt interests and debt-free. Based on EBITDA of $5.1 billion and current healthcare p/e of 16, Valeant should have a market capitalization of $81.6 billion. At 350 million shares, the share price would be around $233.14. What If EBITDA at $3.75 Billion and 5% Growth For this 2nd scenario, we will be slightly positive - what if Valeant meets the top range of its guidance of $3.75 billion? Source: Author Debt + Accumulated Interests - Cash Reserve - Accumulated EBITDA $27.1 billion + $8 billion - $2 billion - $35.8 billion = -$2.7 billion Yes, Valeant would be out of debt with $2.7 billion of cash reserve. What If EBITDA at $3.6 Billion and 0% Growth And lastly, what if Valeant is at the bottom range of guidance of $3.6 billion and experience 0% growth? Source: Author Debt + Accumulated Interests - Cash Reserve - Accumulated EBITDA $27.1 billion + $8 billion - $2 billion - $28.8 billion = $4.3 billion Yes, Valeant would still be in debt of $4.3 billion. However, the leverage would be 1.2x. Summary When investors looks at Valeant, they only remember how it drops from the high $200 to $8, how the U.S. government hates Valeant price-gouging practices, and the massive $30 billion debt. Every bad news that happen to other companies, are somehow associated with Valeant. Valeant became the new evil monstrous villain. Valeant became the new Enron. Yet, that was the old Valeant. Now we are looking at the new Valeant. With its conservative management team, Valeant seems to have a game plan to slash this debt monster and save the company. And with game-changers like Vyzulta, Siliq, and IDP-118; improved sales in Xifaxan, Relistor Oral, and Glumetza; and positive organic growth for its flagship Bausch + Lomb, it should be able to counter the drag from dermatology division while waiting for the division to recover and double its size by pipeline development. And if we take Paul's word on the 5x leverage, we might see that Valeant deploy some cash for some useful acquisitions to build up the pipelines for Salix, or add existing products into Bausch + Lomb catalogs. Also, there seems to be some deja vu. If you really look hard enough, what Joseph Papa and Paul Herendeen are doing, are no different from what Mike Pearson and Bill Ackman had prophesied. Pearson and Ackman looks to build a "Berkshire Hathaway" through buy-outs and pay down the debt through price increase. Pearon and Ackman has done the 1st part, and now it is Papa and Herendeen that is doing the 2nd part - paying down the debt. It is a little harder but at least without the controversies. Now, look at Valeant again. What do you see? Do you see that this new Valeant is no different from the old Valeant, but with a better attitude? You are right. And what is missing is Valeant's old market valuation. Disclosure: I am/we are long VRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I have long positions in Valeant.