Valeant pitches a turnaround but new roadblocks complicate story
- Shares in Valeant Pharmaceuticals rose by more than 15% Tuesday morning in a rare sign of investor optimism in the floundering Canadian drugmaker, which reported its first quarterly profit in a year and a half despite an 11% decline in first quarter revenues.
- Valeant executives continue to pitch the company's eventual turnaround, despite lackluster performance from top drug products like Xifaxan (rifaximin) and a daunting debt burden that still hangs over the drugmaker's future.
- Under CEO Joseph Papa, the company has been working to pay down its debt through asset sales, such as the divestment of its Dendreon unit and several skincare brands earlier this year. Total debt stood at $28.9 billion at the end of March, even after $3.4 billion in repayments since the beginning of 2016 (not including a $220 payment on May 1).
Valeant has dubbed 2017 and 2018 as "turnaround" years aimed at setting the company up for new growth and therapeutic leadership down the road.
And on some of its objectives, Valeant is making progress. The company has raised $2.4 billion in asset sales (pending an expected close of the Dendreon deal), which it is putting toward its goal of paying down $5 billion in debt by February 2018.
The company also expects the anticipated cumulative hit from loss of exclusivity on a range of products to be about $110 million less than previously forecast, leading to a slight upward adjustment to adjusted EBITDA guidance for 2017.
"Delays in generic competition will help Valeant’s near-term earnings, but pricing pressures and volume challenges remain," said Michael Levesque, senior vice president at Moody's, a credit and investment research firm.
But in other areas, the turnaround has hit new roadblocks, which speaks to the ongoing challenges of righting the ship.
Sales of Xifaxan, Valeant's top-seller and key growth driver, fell to $185 million in the first quarter, down 8% from a year ago and 26% from the fourth quarter.
"The story here is that we lost some momentum over the fourth quarter last year and into the first quarter of 17," said company CFO Paul Herendeen on Tuesday's earnings call. "That was due, in part, to the rumored sale of Salix last year and then early this year when we lost a number of sales reps to a new competitor all at one time."
Stabilizing the sales force had been a key goal for the company in 2016, so the disruption in February and subsequent hit to sales is not a positive sign, even if rectified by an influx of new hires.
Dermatology revenue also dropped in the first quarter, falling by 11% year-over-year. Here, the growth story centers on Valeant's newly approved Siliq (brodalumab) for moderate-to-severe plaque psoriasis.
Papa and other executives repeatedly pointed to Siliq as a future source of organic revenue growth but cautioned not to expect sales to "ramp up overnight" when the drug is launched later this year.
Siliq will face tough competition in the psoriasis market, especially as new entrants like Novartis' Cosentyx (secukinumab) and Eli Lilly's Taltz (ixekizumab) perform well. The drug carries a black-box warning for suicidal ideation and will be sold through a Risk Evaluation and Mitigation Strategy (REMS) program, which will likely hurt it competitively.
Overshadowing all of this is Valeant's debt. Under Papa, the company's management has been more aggressive (out of necessity) in paying down its indebtedness, and has refinanced to push maturities for much of its debt out past 2019. But starting in 2020, that debt will start to come due again, complicating any growth picture that has emerged by then.
Interest payments on that debt also continue to weigh on the company and are expected to total $1.85 billion in 2016. To put that in perspective, that sum represents 2.5 times the expected spending for the year on R&D and capital expenditures combined.
Papa told investors on Tuesday's call that he thinks Valeant represents the "turnaround opportunity of a lifetime." Despite some positive steps, there is little sign of that rosy prediction coming true any time soon.
Follow Ned Pagliarulo on Twitter