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JP Morgan Confirms Valeant Is Worthless PDF Print E-mail

Image Monday after-hours Pershing Square's Bill Ackman confirmed he sold his entire stake in Valeant Pharmaceuticals (VRX). Ackman took a $4 billion loss and the stock fell over 10% on the news. Wednesday a JP Morgan (JPM) credit analyst estimated Valeant's some-of-the parts ("SOTP") was $25.2 - $31.3 billion:

WallStCynic: $JPM credit analyst out saying $VRX assets worth no more than $25.2 - 31.3 bil., in sum-of-the-parts analysis. Stock worth zero, in that case.

Apparently the diminution in Salix hurt the company's valuation. According to WallStCynic the value of Salix is now $5.4 - $7.0 billion, down from $9.6 billion previously. Charles Grant of The Wall Street Journal seconded WallStCynic's message, tweeting that JP Morgan "downgrades $VRX credit to neutral, sees best case SOTP enterprise value ("EV") of $31.3 billion." Valeant had net debt of $29.3 billion at Q4 2016. Assuming the proceeds ($1.3 billion) from the sale of certain skincare assets ("Skincare") were used to pare debt, net debt should now be about $28 billion. That said, at an enterprise value of $25.2 - $31.3 billion VRX would be worth $0 to $9.48 per share.

The Situation

Valeant Pharmaceuticals has dominated the financial news cycle. Just after Q4 earnings were released last week management announced it was seeking to restructure about $3 billion in debt, and a modification to certain debt covenants. It confirmed what many had already suspected -- a breach of debt covenants appeared imminent. In the past management has promised to divest assets in order to pare debt. Despite constant market charter, to date the company has only management $2 billion in asset sales. To avoid a negative arbitrage the company must sell assets at about 10x. Chatter suggested that Skincare was sold for $1.3 billion or 13x EBITDA, and Dendreon was sold for $800 million or about 5x EBITDA.

The combined assets were likely sold at a blended multiple of 7.2x EBITDA. In addition, Valeant has to now forgo future earnings and cash flow from divested assets. The company needs all the earnings it can get right now. Q4 revenue and EBITDA fell by 3% and 16%, respectively. Its old business model of growth through price increases and acquisitions is null and void. However, its $28 billion debt load still needs to be repaid. Therein lies the rub. It might not be able to repay debt attached to deals that were executed when it could hike prices at will. 

Is Valeant Led By Managers Or Traders

I previously estimated VRX's sum-of-the parts (ex-Skincare) at $26 billion; this put my valuation in the same ball park as JP Morgan's. However, VRX trades at $11 or $9.4x run-rate EBITDA. I believe the company should use its expensive stock to raise capital instead of selling assets. With an equity raise the company also would not have to forgo future cash flow from divested assets. The funds could be used to pare debt, fund future legal payouts and increase the company's chances of survival. I previously suggested that Valeant raise equity and was harangued by VRX bulls:

Commenter1 :So they should dilute equity to preserve a sum of parts of $1 per share? By that logic, they should just file for bankruptcy now, putting a stay on the lawsuits, and start with a clean slate on the other side. Or maybe Ackman can convince the board to dilute the share at the inflated price of $18.

Commenter 2: If, as you hypothesize, under either scenario, the value of VRX is $1, why do the capital raise? It appears that you are once again talking your book, not making sense.

VRX is off over 50% since my original recommendation. The company is now at the mercy of debt holders. VRX is a day trader's dream; a trader can exploit wild swings in the stock on a weekly basis. An equity raise would drive the stock lower, and potentially create short-term losses for traders. I suspected that Ackman would have been a critic of issuing equity. Now that he is no longer in the picture, it would behoove CEO Joe Papa to manage the company for the long-term. If he believes in Valeant's prospects he should raise equity, buying the company time for under performing businesses to bottom and new products like Brodalumab to kick in.

Assuming a 30% discount to the current share price, Valeant could raise another $2 billion by issuing 260 million shares at $7.70. It would be dilutive to existing shareholders by about 43%. The new capital could cut debt and reduce interest expense by about $120 million annually. The stock could rise gradually over time after Papa prove Valeant's ability to develop new drugs, and the growth prospects of Salix and Bausch & Lomb materialize.


Bill Ackman has thrown in the towel on VRX and so has JP Morgan. VRX remains a sell.


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.

Shock Exchange is the best book ever written on President Trump and his rise, fall, and rise to power; it is the only one written from a black perspective. Shock Exchange has been added to the Trump Syllabus K12 compiled by Kaye Wise Whitehead, Associate Professor. Department of Communication, Loyola University Maryland.

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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