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Valeant (VRX) Issues Notes, Restructures Debt; Shares Down

Zacks Equity Research

Valeant Pharmaceuticals International, Inc. VRX commenced an offer to purchase cash up to $600 million of aggregate principal amount of the outstanding 6.75% senior notes due 2018.

On Mar 3, the company had announced the divesture of its skincare products. The company used the net proceeds of the sale to pay down approximately $1.1 billion of its senior secured term loans.

Concurrently, Valeant is seeking to refinance and amend its existing credit agreement. The company will borrow new term B loans under the credit agreement and simultaneously issue secured debt securities. The refinancing is expected to extend the maturity date of the revolving facility and the term B loans that mature prior to 2022 and enable company repay all of the outstanding term A loans along with removing the maintenance covenants from the term B loans and repaying a portion of the outstanding 6.75% senior notes due 2018.

However, the refinancing raised serious doubts about the company’s ability to service such huge levels of debt and further adds to its existing woes. Shares declined on this news.

Last week, the company reported fourth-quarter results which beat expectations but the guidance for 2017 was disappointing. Once an acquisition giant, Valeant was caught up in various controversies in 2016-price hike of specialty drugs, erroneous financial reporting and termination of contracts with Philidor Rx Services. 

The guidance for 2017 poses concerns about the company’s organic growth. Valeant witnessed an improvement in sales force turnover owing to some voluntary and involuntary changes. Moreover, generic competition of key drugs will continue to impact results. The company is facing generic completion of its neurology products while the dermatology segment is also facing weakness.

On Nov 8, 2016, Moody’s Investors Service downgraded the company’s credit rating to B3 from B2.

We note that the shares of Valeant have underperformed the Zacks classified Medical-Drugs industry in the last one year. The stock lost 82.5% as compared to the industry’s gain of 4.6%.

Zacks Rank & Key Picks

Valeant currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the health care sector include Sunesis Pharmaceuticals SNSS, Celgene Corp. CELG and GlaxoSmithKline plc GSK. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sunesis’ loss estimates narrowed 5.06% and 8.80% for 2016 and 2017, respectively, over the past 30 days. The company recorded positive earnings surprises in three of the last four quarters, the average being 0.54%.

Celgene’s earnings estimates increased from $6.52 to $6.60 for 2017 and from $8.15 to $8.16 for 2018, over the last 60 days. The company posted positive earnings surprises in three of the four trailing quarters with an average beat of 5.08%.

GlaxoSmithKline’s earnings estimates increased from $2.66 to $2.76 for 2017 and from $2.80 to $2.85 for 2018 over the last 30 days. The company posted a positive earnings surprise in three of the four trailing quarters with an average beat of 11.03%. Its share price increased 6.7% year to date.

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