Valeant (VRX) Provides Plenty to Support Bullish Thesis - Guggenheim
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Guggenheim analyst Louise Chen reiterated a Buy rating and $55 price target on Valeant Pharmaceuticals (NYSE: VRX) following a Q2 miss but reaffirmed '16 EPS guidance.
Chen notes, "VRX has noted since its 1Q16 call that it expects the business to recover in 2H16 as it moves past the issues with its derm business, and achieved its objective to report a 40%/60% earnings split between 1H16/2H16. Therefore, our investment thesis remains intact, and we continue to believe that VRX's growth prospects are underappreciated. Upsides could come from: 1) divestment of non-core products to pay down debt and an easing of debt covenants; 2) meeting quarterly earnings in '16; and 3) approval and launch of brand drugs"
The analyst noted the followingpPositives from 2Q16 call and release that support their bullish thesis:
1) CFLO from operations was $448MM (included a one-time payment on Salix settlement) vs. $411MM 2Q15, an increase of 9% YOY.
2) Progressing with divestitures of non-core assets to pay down debt. VRX has sold, or agreed to sell, the brodalumab EU rights, Synergetics USA OEM business, and Ruconest, for a total combined upfront payment of $181MM, and additional consideration up to $329MM. VRX has also identified assets that could be worth ~$8B if sold.
3) VRX expects FCF and non-core asset sales to reduce debt by more than $5B over 18 months and to improve covenants for its debt; both of these initiatives should remove a meaningful overhang on shares.
4) VRX is still confident that sales growth will improve in 2H16 as the company gets through issues with its derm business. VRX continues to work with Walgreens (WBA, BUY, $80.63) to improve their distribution deal (~50% of derm drugs go through WBA), and VRX still plans to sell generic drugs through WBA.
5) VRX is working toward approval for Vesneo and should be ready for manufacturing reinspection in ~six months. We think VRX's pipeline is underappreciated.
The firm lifted 217 EPS estimates.
Shares of Valeant Pharmaceuticals closed at $22.45 yesterday.
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