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new york shock exchange
new york shock exchange

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Valeant: Why Ackman Bailed PDF Print E-mail

Image Monday Pershing Square's (OTCPK:PSHZF) Bill Ackman sold his entire stake in Valeant (NYSE:VRX) for an estimated loss of over $3 billion.

Bill Ackman's Pershing Square has sold its 5.3 per cent stake in Valeant Pharmaceuticals, bringing down the curtain on one of the most disastrous investments in the hedge fund's history. The fund lost more than 90 per cent of its investment as Valeant plunged into financial crisis, and Mr. Ackman concluded that the tax losses would be more valuable to Pershing Square than any potential rebound in the stock ...

News that the "smart money" had exited the stock sent VRX down 9% in early morning trading. The following charts explain why Ackman finally threw in the towel.

Valeant's Sum-Of-The Parts Is $0

Valeant's two growth engines are Salix and Bausch & Lomb. To properly value the company, one has to fully understand the business prospects of U.S. Diversified and Branded Rx (ex-Salix). The demise of U.S. Diversified was well-known; the demise of Branded Rx (ex-Salix) likely was not.

In November, I suggested this segment was the company's next pariah. Its Q3 revenue fell 36% Y/Y. Dermatology, the lion's share of the segment's revenue, was reeling from the loss of Philidor's marketing heft and competition from generics. My sum-of-the-parts valuation bifurcated Branded Rx (ex-Salix). It led to a lower valuation than that of other analysts.

Image
VRX is worth $0 and that's optimistic
 

 

 

 

 

 

 

 

 

 

The company's total Q4 EBITDA of $887 million was down 16%. EBITDA from Branded Rx (ex-Salix) and U.S. Diversified was down 16% and 28%, respectively. After applying a 5x EBITDA multiple to Branded Rx (ex-Salix) and U.S. Diversified, the sum-of-the-parts was $0. VRX closed Monday at over $12, but the underlying math suggested it was worth far less.

Valeant's Demise Will Likely Worsen

VRX bulls talk up growth prospects for Salix and Bausch & Lomb. The rub is that over 30% of the company's segment EBITDA (prior to corporate allocations) comes from Branded Rx (ex-Salix) and U.S. Diversified; their demise will likely continue due to heightened competition and a loss of pricing power. The following chart assumes Q1 2017E revenue and EBITDA will decline Q/Q by 6% and 11%, respectively.

  • Analysts expect Q1 revenue of $2.17 billion. Q4 2016 actual revenue was $2.40 billion. I assumed that excluding certain skincare products ("Skincare") that were recently divested, proforma Q4 revenue would have been $2.32 billion or $87 million lower.
  • We know Skincare was sold for $1.3 billion - an estimated 13x EBITDA of $100 million. That implies Skincare generated about $25 million in EBITDA per quarter. Proforma Q4 2016 EBITDA for Valeant would be $862 million.
  • Q1 2017E revenue would be off about 6% sequentially. I assumed that the cost decline would be only 60% of the revenue decline, or about 4%.
  • EBITDA would fall 11% to $771 million and EBITDA margin would tick down to 36%.
  • This could be kind given that Q4 revenue and EBITDA fell Q/Q by 3% and 16%, respectively.

Under these assumptions, total debt of $28 billion (after proceeds from Skincare) would be about 9.1x full-year 2017E run-rate EBITDA, up from 8.1x currently.

Takeaway

The sum-of-the-parts for VRX is $0 and will likely worsen as Q1 2017E revenue and EBITDA could both decline by double digits. I expect debt/EBITDA to deteriorate to 9x or higher throughout 2017. If or when VRX bottoms, its debt load could become untenable. Ackman bailed on VRX and so should you.

 

On Shock Exchange 

With the critically acclaimed, Shock Exchange: How Inner-City Kids From Brooklyn Predicted The Great Recession And The Pain Ahead, author Ralph W. Baker, Jr. predicted the current global economic slow down, the demise of China, emerging markets and the pending stock market crash.

Where to Buy:

"Shock Exchange" is available electronically through Barnes & Noble (NOOK), Amazon (Kindle), iTunes, etc. The print version is available through the following retailers and bookstores:  

Print Version: 

Amazon http://www.amazon.com/

Barnes & Noble online http://www.barnesandnoble.com/

Hampden-Sydney College Bookstore: http://cougar.hsc.edu/cgi-bin/main_inv.exe , item number: 38561. Or call Jason Huskey at 434-223-6117.   

 

 

 

 

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