Valeant Pharmaceuticals (NYSE:VRX) is one of the most heavily debated stocks in the pharmaceutical space, and for good reason. Late last year, the company was caught in the middle of a scandal that led to declining investor sentiment, a completely shift in management, and a massive decline in the price of its stock. However, since the scandal, many see the company as one that has turned around completely. Personally, I side with the bulls on VRX. Today, we'll talk about why.
Morgan Stanley Upgrade
If you follow my work, you know that I never advise blindly following the opinions of analysts. The truth is that they are only human, which means they too are subject to error. However, recently a Morgan Stanley (NYSE:MS) analyst by the name of David Risinger upgraded the stock. In so doing, he noted some key points.
In his comments, Risinger made a point of the fact that Joseph Papa has really shifted management around, turning it into a more trusted company. He also said that the new management team seems to be making the right moves, which should lead to growth for VRX. He also went into NOLs that offset tax issues associated with asset sales and upcoming consideration payments. Finally, he was impressed with the fact that the company is on the right track toward paying off debt. Here's a key quote from the release that outlines 4 reasons that Risinger decided to upgrade VRX:
- Papa had been in discussions with new CFO Paul Herendeen for a few months to bring him on board. Papa did not commit and say that Herendeen has “bought in” to 2H16 guidance, but commented that Herendeen had spent a lot of time trying to understand the business before taking the role.
- The company has approximately $2B of NOLs in the U.S. and $2B in Canada, which help offset tax leakage in asset sales.
- Mgmt. believes investigation-related settlements are two years away at minimum. Once fines/settlements are “estimable and probable” then the company will reserve cash for settlements in restricted cash (as per accounting rules).
- Upcoming contingent consideration payments include ~$150M for brodalumab approval and $50M for Relistor oral. We already factor in $400M of contingent consideration in 2H16 in our cash flow model.
It's A New Company
When we talk about VRX, we're talking about a new company with the same products and others coming on board. The reality is that any company is only as strong as the management that runs it. Unfortunately, the previous management team that was part of the company made huge mistakes. However, Papa knew that he had to shake things up and bring other people in to really revamp the process and improve the company. Since his start with Valeant, he has done just that.
At the end of the day, VRX has a strong lineup of great products. It has agreements with leaders in the industry to sell these products. Now, the company has a new management team that's focused on increasing sales, paying off debt, and returning value to shareholders. All in all, I believe that we've seen a complete 180, and that this stock will climb from here.