Back to top

Bear of the Day

People tend to raise their eyebrows when they hear that a management team that has led a company into mounting troubles, decided to award $100 million in retention bonuses to the same people that got them into trouble in the first place.  Especially, if that team has had some accounting problems, signed a distribution deal that has resulted in a negative average selling price (ASP), and lost $373.7 million dollars last quarter.  These are a few reasons why Valeant Pharma (VRX - Free Report) is the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) is a pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products primarily in the areas of neurology, dermatology and branded generics. The Company produces medicines that meet the special health problems of patients. Valeant's development pipeline strategy comprises both new compounds as well as product life cycle management. Its early and late-stage drug candidates have unique formulations and mechanisms of action including retigabine for the treatment of epilepsy and pain, taribavirin of the treatment of chronic hepatitis C, and several dermatology candidates for the treatment of rosacea, acne, and dermatological fungus.

Earnings Results

In the first quarter 2016, the company saw total revenues of $2.4 billion, a 9% increase from Q1 15, but that was one of the very few bright spots.  On a year over year basis, the company increased their cost of goods sold to 27% from 24%, SG&A expenses increased $239 or by 42%, investment in research and development rose $47 million or 42%.  Further, the company posted a net loss of $373.7 million in Q1 16 compared to a net gain of $97.7 million in Q1 15.  Also, adjusted net income was only $442.6 million compared to $704.2 in the year ago quarter. 

Management’s Take

According to Joseph Papa, Chairman and CEO, "The first quarter's results reflect, in part, the impact of significant disruption this organization has faced over the past nine months. This has been a difficult period for Valeant and its stakeholders, and while there are some challenges to work through in certain business operations in 2016, such as our U.S. dermatology unit, the majority of our businesses are performing according to expectations.

Current Price and Estimate Consensus Graph

As you can see from the graph below, Valeant’s stock price has significantly tumbled over the past several months and their earnings estimates have declined as well.

Declining Estimates

Earnings estimates have declined for Q2 16, Q3 16, FY 17 and FY 18 over the past 60 days; Q2 16 fell from $2.17 to $1.65, Q3 15 dropped from $2.41 to $1.86, FY 16 tumbled from $8.60 to $6.83, and FY 17 plummeted from $10.49 to $8.13. 

Bottom Line

Valeant’s core franchises are considered to be deteriorating, and their Walgreens distribution program is not performing to expectations.  Further, with a limited pipeline of new drugs, investors are not finding a solid catalyst for Valeant rebounding from their recent woes. 

If you are inclined to invest in the Medical/Drugs segment, you would be best served by looking into Mediwound Ltd (MDWD - Free Report) , and or Zoetis Inc. (ZTS - Free Report) , both of which carry a Zacks Rank #1 (Strong Buy).

Note: Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.