Valeant's Debt In 2020 'May Be Too High A Hurdle'

Valeant Pharmaceuticals Intl Inc VRX filed its 10-Q for 1Q16 on July 7. Wells Fargo’s David Maris maintained an Underperform rating for the company, while reducing its valuation range from $25-$30 to $17-$22. The analyst expressed concern regarding the deterioration in Valeant’s core franchises and its operating cash flow generation.

Valeant lost $374 million in 1Q. The company’s cash from operations increased only ~$67 million y/y, despite more than $15 billion being spent on acquisitions in 2015-2016, analyst David Maris said. He added, “There was really nothing in the quarter that was a bright spot, in our opinion.”

The adjusted EPS estimates for 2016 and 2017 have been reduced from $8.81 to $6.74 and from $9.85 to $7.72, respectively.

Grave Debt Situation

Valeant’s CFO stated that the company cannot accurately predict its GAAP earnings. Maris pointed out that in the absence of a forecast for GAAP earnings, the company would not be able to predict GAAP cash flows, and “how is it then so certain it has the liquidity to cover its debt obligations?”

Valeant’s balance sheet currently shows total debt of about $32 billion, up from $31 billion at the end of 2015. The company has another ~$15 billion coming due through 2020.

The analyst mentioned that given these figures “we just do not see how $560 million per quarter of cash flow from operations will be sufficient to cover the company’s obligations or excite debt holders enough to refinance in the coming months, especially since Valeant’s management said it may take at least another six months before it can stabilize the business.”

Walgreens Distribution Program

Valeant finally disclosed some of the economics related to its Walgreens distribution program. “We have long been skeptics of the benefits of this program to Valeant’s financials, but it appears the program is performing even worse than we had feared,” Maris wrote.

Prescriptions filled through the Walgreens program had negative ASPs. CEO Joe Papa indicated that the deal with Walgreens Boots Alliance Inc WBA would need to be renegotiated to make the terms more favorable to Valeant.