Guggenheim Remains Positive on Valeant (VRX) post Q3: 'In the Kitchen Sink, but Not Down the Drain'

November 8, 2016 10:35 AM EST
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Price: $14.90 -1.39%

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Guggenheim analyst Louise Chen weighed in on Valeant Pharmaceuticals (NYSE: VRX) after the company reported, as expected, a 3Q16 miss and lowered its '16 EPS guidance.

Chen commented, "VRX has noted since its 1Q16 call that the business should start to recover in 2H16. Evidence of this was demonstrated in 3Q16 as VRX reported sequential improvements in sales and EBITDA throughout the year. Therefore, despite the miss and guide down for '16 and '17, our investment thesis remains intact, and we continue to believe that VRX's growth prospects are underappreciated. Upside could come from: 1) divestment of non-core products to pay down debt; 2) meeting quarterly earnings in '16; and 3) approval and launch of brand drugs."

Positives from 3Q16 call and release that support the firm's thesis:

1) On a sequential basis, sales grew from a base of $2.37B in 1Q16 to $2.42B in 2Q16 to $2.48B in 3Q16.

2) Adjusted EBITDA for 3Q16 came in at $1.16B, an improvement over 2Q16 results of $1.09B and 1Q16 results of $1.01B.

3) Wholesaler inventory levels at Salix were reduced to ~1.5 months as of 9/30/16, consistent with the overall inventory levels for VRX's U.S. products.

4) GAAP CFLO from operations was $570MM vs. $448MM in 2Q16.

5) Dermatology, Ophthalmology, GI and Consumer are four areas that VRX is still committed to growing. The company stated it has received compelling bids for some of these assets and believes that it is VRX's fiduciary duty to evaluate those offers. VRX expects free cash flow and divestitures to go toward $5B of debt paydown by early '18. For context, VRX had $30B of long-term debt as of 9/30/16.

The firm maintained a Buy rating and price target of $55 on VRX.

For an analyst ratings summary and ratings history on Valeant Pharmaceuticals click here. For more ratings news on Valeant Pharmaceuticals click here.

Shares of Valeant Pharmaceuticals closed at $19.13 yesterday.

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