Reasons to Keep Shorting Valeant Pharmaceuticals Intl Inc (NYSE:VRX) Shares


Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares were down 21.69% to $14.98 on Tuesday and an additional 0.89% in after-hours trading. Share prices have been trading in a 52-week range of $13.77 to $119.87. The company has 341.19 million shares outstanding.

Valeant Pharmaceuticals reported its quarterly earnings yesterday, revealing that revenue fell 11% while EBITDA dropped 23% on a year-over-year basis. The company reported revenue of $2.48 billion, much lower by $10 billion compared to analysts’ estimates.

The EBITDA margin was 43% versus 49% in the year earlier period and management expects 2017 results to be lower than that of 2016. This is due to the expiration of certain exclusive agreements, which account for 19% of revenue and 30% of segment operating income.

Moving forward, Valeant Pharmaceuticals will shift its focus to reducing debt through cash flow management. This represents a different approach compared to their earlier strategy of making revenues through acquisitions and price increases. Price rollbacks are expected to take effect on a number of their products, which could significantly weigh on their bottom line in the coming periods.

In fact, management slashed its guidance for the full-year 2016, projecting that total revenues to come in at $9.55-$9.65 billion, down from its prior range of $9.9-$10.1 billion. This translates to earnings per share at $5.30-$5.50 versus its prior range of $6.60-$7.70. This prompted Moody’s Investors Service to downgrade Valeant Pharmaceuticals stock.

Soon after, law firm Kahn Swick & Foti announced that has commenced an investigation into Valeant Pharmaceuticals, focusing on whether or not the company and its officers  violated state or federal securities laws. Analysts have noted that this illustrates another case of an unsustainable business strategy, driven mostly by growth through acquisition and price increases.

Recall that the company issued a relatively upbeat outlook for 2016 in its earlier earnings report, even as total revenues were down 11% then.

We continue to make progress towards stabilizing the organization,” said Joseph Papa, Chairman and CEO of Valeant Pharmaceuticals back in august.

Keep in mind that several other investigations were underway at that time, as the company saw its value cut in half since their peak in mid-2015. Accounting errors have spurred criminal investigations and drug price increases have also been scrutinized by regulators. At this point, Valeant Pharmaceuticals will have to sell some of its businesses in order to pay off debt, risking some of its faster-growing revenue streams in the process. While the company could stay afloat on revenues from its pending in-house drug applications, there are only two in the pipeline and have yet to get FDA approval.

Valeant Pharmaceuticals is a pharmaceutical and medical device company that is engaged in developing and marketing a range of branded, generic and branded generic pharmaceuticals, over-the-counter products, and medical devices such as contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices.

The company operates through two segments: Developed Markets and Emerging Markets. Its Developed Markets segment focuses on the areas of dermatology, neurology, gastrointestinal disorders, and eye health therapeutic classes. Its Emerging Markets segment focuses on primarily on branded generics, OTC products and medical devices.

Its pharmaceutical products include Xifaxan, Solodyn and Glumetza while its OTC products include PreserVision, CeraVe, Biotrue and Boston. Its other generic products include Latanoprost and Metronidazole. Its ophthalmic surgical products include intraocular lenses, such as Akreos, enVista, Crystalens and Trulign.