By Parke Shall
Valeant (NYSE:VRX) has certainly made a lot of progress, but it still has a lot of work to do before it becomes a mainstream, investable company. The company needs to escape the negative news headlines, which it'll have trouble doing for as long as guys like Buffett go on CNBC and call the company things like "a sewer".
The company can turn itself around and can see its stock price rise once again, but it is going to be a significant amount of work needed from new CEO Joe Papa, who William Ackman stated on CNBC today was the company's "first choice" for new CEO.
VRX data by YCharts
Many people seemed confused last week when the company filed its form 10-K and the stock lost nearly 10% of its value at one point. Social media was plagued with comments from investors trying to reconcile why the good news was not leading to a rise in the stock.
We believe this was due to two different dynamics at play.
First, we believe that investors had already decided to buy the lead up to the filing. It seemed as though the market did not have much doubt that the company would file its annual report and VRX was bid up in the days and week prior to its filing deadline. The company reiterating that it would be filed combined with William Ackman's numerous statements that the company was going to file on time likely priced the news in early. It then became a "sell the news" event after the company finally announced that it filed.
In addition to this, the news that the company was going to be rearranging its Board of Directors had already been announced earlier in the week by the media. The ensuing halt and announcement of the new Board of Directors was the news that we believe was already priced in.
That took the wind out of VRX's sails last Friday.
The second reason that the stock did not get the boost people wanted was a new slew of risk related/regulatory language in the 10-K. While the 10-K was filed, it appeared to be a "kitchen sink" event, placing blame for the past accounting wrongdoing on the former CFO and acknowledging many pages of risk factors on a go forward basis while hacking away at numerous estimates for the year to come.
A third potential headwind for the company last week was the Senate hearings attended by former CEO Pearson, Howard Schiller, and William Ackman. Schiller and Pearson appeared regretful and admitted to an array of mistakes, finally giving in that price gouging was egregious and a key part of the business plan. New board member William Ackman did his best to come off as unaware of what was happening and as the potential white knight for the company in the future. Of course, we don't believe that Mr. Ackman was as ignorant as he made himself out to be with regard to price gouging, but he still did a good job in front of Congress to make himself out to be responsible for the job going forward.
He promised negligible price drops on some drugs that have seen their prices gouged so much that an "across the board" 30% drop is almost laughable. Regardless, these hearings are over and do not look to be a catalyst for the company anytime again in the near future.
It's Not All That Bad Going Forward
New CEO Joe Papa certainly has his work cut out for him. He is dealing with a very leveraged company that made numerous acquisitions at prices far too high. It is going be a fine line that Papa must walk in terms of managing the company's future cash flows to make sure that it can responsibly service it's debt, deal with all new coming regulatory inquiries, and steady itself as a business moving forward.
We have confidence that Papa is the guy that can get this done, based on his track record, network within the industry and experience.
Further good news is that no more accounting misstatements appear to have been made and that Valeant has concluded its internal investigation without any additional alarming findings. This is not to say that risk does not remain more elevated than other companies, because it does (especially headline risk), but we think VRX has turned a corner and can be rebuilt from here.
It's going to take work, and it's going to take patience, but with the company trading 3X earnings, a new Board, a new CEO and a new attitude, Valeant is definitely investable again and not nearly as broken as the street is making it out to be.
We continue to believe that VRX could potentially double from this point moving forward, but it is going to take a lot of work and a steady hand from new CEO Papa. We are also interested in the credibility that new board members could bring to the company, once announced. Papa's first test is going to be steadying the company from investability standpoint and letting the public know that things are different. His first conference call and communication with shareholders and analysts will be paramount. Papa's first day on the job was today, Monday, and we're optimistic and look forward to his contributions moving ahead from here.