Heard on the Street: Valeant Still Has No Cure in Sight — WSJ

By Charley Grant 
 Stock Market Quotes, Business News, Financial News from http://commodity-market-news.com

Valeant Pharmaceuticals International managed to please its shareholders Tuesday morning. But the company hasn’t put its tumultuous past entirely to rest.

Valeant reported second-quarter sales of $2.4 billion and adjusted earnings of $1.40 a share. Both fell short of analyst expectations for the third consecutive quarter. Still, the stock rallied sharply after Valeant reaffirmed its full-year guidance for sales and adjusted profitability metrics and announced a new sale of one of its drugs to raise cash.

It is certainly true that avoiding another guidance cut is a positive for Valeant. Its shares are down by nearly 90% since last August. Generally speaking, stocks that have been beaten down, with correspondingly low expectations, can often make the best opportunities for stock investors. With a debt-default scare in Valeant’s recent past, putting worries over its balance sheet in the rearview mirror could power the stock price higher.

But a closer look at the numbers suggests that backing up Tuesday’s upbeat outlook will be a tall order. For starters, Valeant will need to earn about 60% of projected annual adjusted profit before interest, taxes, depreciation and amortization in the final two quarters of the year. And former key drivers of profitability remain in rough shape. For instance, revenues in the dermatology segment, the epicenter of Valeant’s recent scandal surrounding its sales practices, fell 55% in the quarter from a year ago.

There are signs of modest progress there. Valeant said Tuesday it started making a gross profit on new dermatology prescriptions filled through the Walgreens pharmacy last week. Still, a turnaround in that business already was assumed in existing guidance.

Meanwhile, revenue from its best-selling drug, the gastrointestinal treatment Xifaxan, was $200 million, down slightly from the first quarter. CEO Joseph Papa said an inventory drawdown, and lower average selling prices of the drug, caused the soggy results. Existing company forecasts of $1 billion in annual Xifaxan sales now seem far-fetched.

Generic competition, meanwhile, looms for Nitropress and Isuprel, the subject of a Wall Street Journal investigation into drug-pricing practices and two separate congressional hearings. That is another obstacle to profitability.

With growth still lackluster, reducing Valeant’s debt load will remain a challenge. Three recent asset sales helped lower its debt burden from the first quarter total, but long-term debt still exceeds $30 billion.

To that end, Mr. Papa informed analysts that Valeant is seeking to amend its credit agreement for the second time this year. That should be attainable, but will likely translate into higher interest costs. That will present another drag on profitability. Meanwhile, several investigations from regulators are still ongoing.

Tuesday’s earnings were good enough for Valeant shareholders to breathe a sigh of relief. A clean break from its troubled past remains some way off.

Write to Charley Grant at charles.grant[a]wsj.com

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