Mar 21 2020

Valeant s White Knight: Joseph Papa – vrx, Seeking Alpha, dendreon pharmaceuticals.

#Dendreon #pharmaceuticals

dendreon pharmaceuticals

Valeant s White Knight: Joseph Papa

  • Joseph Papa, CEO, has galvanized Valeant into action by expanding the sales force, investing in its core businesses, and growing R D.
  • Furthermore, the company’s 20-year partnership with Walgreens has already proved to be beneficial, as evidenced by 2Q results.
  • At $11.49 per share, Valeant’s stock is a strong buy as Valeant could reach $40/share by the end of 2020.

By Paul Lebo, CFA, Greg Wilkins and David Raczka

Company Overview

  • Valeant Pharmaceuticals (VRX) develops, manufactures, and markets an astounding array of pharmaceuticals and medical products that are marketed in over 100 countries and serves 150 million customers.
  • The Company’s products are separated into three distinct areas:
    • Bausch + Lomb / International Segment (48% of FYE 2016 Revenue)
    • Branded Rx Segment (33% of FYE 2016 Revenue)
    • U.S. Diversified Products Segment (19% of FYE 2016 Revenue)

New Management Team

Joseph Papa was brought in as CEO in May 2016 to lead VRX’s turnaround. Prior to joining the company, Papa had more than 15 years of experience leading pharmaceutical companies. From 2006 to 2016, he was the chairman and CEO of Perrigo. From 2004 to 2006, Papa was chairman and CEO of the pharmaceutical and technologies services of Cardinal Health. From 2001 to 2004, he was president and chief operating officer of Watson Pharmaceuticals. He has also worked at Novartis and Pharmacia/Searle.

Key steps taken by Joseph Papa and his new management team include:

  • Initiating a significant sales force expansion in its core business units, particularly in its GI segment:
    • In the first quarter of 2017, the company hired 250 sales force representatives and managers to enhance relationships with primary care physicians.
  • Increasing R D expenditures by 26% for the FYE16 period:
    • The R D organization now consists of roughly 1,000 employees.
    • Core assets benefitting from the new R D investment include Dermatology, Eye health, and GI segments.
  • Creating a 20-year partnership with Walgreens (NASDAQ:WBA):
    • This partnership avails certain Valeant products to Walgreens customers through a patient access/co-pay program.

Strategic Planning

In August 2016, VRX committed to paying down $5 billion in debt from divestiture proceeds and cash flows from operations within an 18-month timeframe of that statement. Since making that commitment, the company has paid down approximately $2.5 billion in debt. VRX has divested or agreed to divest a number of assets, which will reduce the complexity of its portfolio and which will generate total asset sales proceeds of approximately $2.7 billion. To reduce debt and focus on its core businesses, Valeant sold CeraVe, AcneFree, and AMBI skincare brands for $1.3B and subsidiary Dendreon Pharmaceuticals for $820MM. Valeant also recently announced that it has agreed to sell iNova for $930MM and Obagi Medical Products for $190MM. In aggregate, the company has reduced approximately $3.6 billion of debt since the end of 1Q 2016. We anticipate that VRX will continue to divest assets, a move that typically serves as a tailwind for companies undergoing a turnaround strategy.

In late breaking news, VRX announced this morning that it agreed to sell its Sprout Pharmaceuticals subsidiary, which produces the drug Addiyi, to a buyer affiliated with Sprout’s former shareholders. Under the arrangement, VRX will be entitled to a 6% royalty on sales of Addiyi, beginning in approximately 1.5 years. Critically important to the deal is a dropping of all litigation against VRX, which effectively serves as an overhang removal and a tailwind for VRX stock.

Financial Performance

  • As expected, after divesting these businesses, Valeant’s revenue and EBITDA have declined over the past two years.
  • Nevertheless, not until 2020 will Valeant have another significant principal payment due. This time buffer gives management three years to execute its strategy and gradually pay down the debt.
  • The following chart demonstrates that the core business units of Valeant remain stable, with FYTD 6/30/17 Bausch + Lomb and Branded Rx segments not far from the prior year comparable period.

Dendreon pharmaceuticals

  • Despite the apparent decline in Bausch + Lomb sales during the 6/30/17 period, second quarter organic growth (excluding divestitures and currency effects) was a positive 6% for B+L.


  • There are currently over 100 R D projects in the pipeline, including the following products:
    • Several new drugs for the treatment of plaque psoriasis
    • A new ocular redness reliever
    • Eye drops for patients with glaucoma
    • Ophthalmic surgical products
    • New monthly replacement contact lenses and contact lens solutions
    • A drug for opioid-induced constipation

In 2017, VRX expects to launch approximately 50 products that will drive $100 million in incremental revenue.


  • Given VRX’s GAAP net loss and debt, we believe an Enterprise Value/EBITDA approach is appropriate for valuing the company. At current values of debt and equity, Valeant’s EV/projected 2017 EBITDA of

8.50x is below the 12.94x average among a chosen comp set of similar businesses (Pfizer (NYSE:PFE), J J (NYSE:JNJ), AstraZeneca (NYSE:AZN), Taro Pharmaceutical Industries (NYSE:TARO)).

  • Given the company’s recent challenges, relative size, and above average debt, a discounted multiple is appropriate. However, we would argue that as management pays down the debt, the multiple will conservatively expand towards a more sustainable 10x level in the coming months.
  • With room for multiple expansion, as well as a long-term focus on debt repayment, there is a potential for outsized equity returns over the next 3-5 years if investors believe that enterprise value should remain roughly around an 8.50-10x EBITDA multiple.
  • For investors not familiar with Enterprise Valuation, it is calculated as the sum of debt, equity, and minority interest, minus cash on hand. Enterprise value represents the theoretical “take-over” value of a firm. As debt is repaid, and the overall valuation of the firm remains stable (or grows), the implied equity value should rise over time, all else equal.
  • Investment Strategy

    Overall, investors should applaud the change in business direction implemented by Joseph Papa. Purchasing shares ahead of 3Q earnings on November 7 provides compelling upside potential with limited downside risk. Investors may also elect to implement a straddle option strategy to take advantage of increased volatility in a risk conscious manner as the stock price gallops into year end.

    Disclosure: I am/we are long VRX.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Written by admin