Whisper numbers indicate another earnings beat on cards for Valeant Pharmaceuticals (NYSE:VRX) Intl Inc.
Canada based specialty pharma company, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is scheduled to report its second quarter FY 17 earnings tomorrow. Last quarter the company had surprised analysts as well as investors by not only delivering an earnings beat but more importantly it has also upped EBITDA guidance for the year. It had raised its full year 2017 non-GAAP adjusted EBITDA guidance to $3.60 - 3.75 billion from $3.55 - 3.70 billion. The company had also delivered a rare GAAP profit in the previous quarter, first one after September 2015. All these factors led to a massive rally in Valeant stock and helped it recover from the lows the stock had hit after Bill Ackman's exit. Bill Ackman had to book a loss of $4 billion on his Valeant investment.
This time around, analysts expect the company to report an adjusted EPS of $0.97 on revenues of $2.24 billion. While many are expecting the company to deliver an earnings beat, the so-called Whisper number is $1.01, the company is unlikely to report a GAAP profit in this quarter. Valeant was able to deliver a GAAP profit last quarter due to a massive one-time tax benefit of $908 million, which is unlikely to happen this quarter. Valeant stock got a boost this quarter after the appointment of John Paulson, who is currently the largest shareholder in the company, on the board of the directors. Paulson’s experience and expertise in the investment industry will assist Valeant with its strategic decisions including asset sales and the rumored debt for equity swap.
Balance Sheet is not likely to look much better than last quarter.
Valeant management continues to focus on reducing its balance sheet risk by selling assets and paying down debt. In August 2016, the company had committed to paying down $5 billion in debt from divestiture proceeds and cash flows from operations within an 18-month timeframe. Valeant appears to be on track to meet this commitment. The drugmaker had reduced its long-term debt by $1.3 billion in the first quarter, leaving it at $28.54 billion on March 31. In the current quarter, the company announced the sale of iNova in June and Obagi Medical Products in July.
However, these assets sales will not be closed until the later part of this year, hence it is unlikely to impact company's balance sheet. Valeant did redeem $811 million of 2019 bonds, but the redemption happened in this quarter. While balance sheet is not likely to look much better than the previous quarter, investors must keep on eye on the debt number as well as any announcement pertaining to asset sales. Valeant needs to get control of its debt fast. The recent earnings of Israel based drugmaker Teva Pharmaceutical (NYSE:TEVA) once again impressed upon investors the flip side of leverage. While leverage magnifies the upside, it does same to the downside.
Valeant has also successfully managed to extend maturities and adjusted the terms on some of its borrowings. Valeant will have no significant debt maturities and no mandatory amortization requirements through 2019. The company also managed to improve its fixed-to-floating debt ratio. Valeant now has 75% fixed versus floating rate debt. But Valeant has still a long way to go. The asset sales while reducing debt have also led to a reduction in earnings, which has worsened its leverage. Total debt declined from $32.309 billion in 1Q16 to $28.88 billion in 1Q17, but trailing-twelve-month EBITDA fell from $5.247 billion to $4.158 billion, which led debt-to-EBITDA to increase from 6.2x in 1Q16 to 6.9x in 1Q17.
Valeant stock has tanked 15% going into the earnings.
It has been a good quarter for Valeant stock investors. Valeant stock is up by more than 50% since the company had reported its first quarter earnings on May 9th. In fact, a couple of weeks ago Valeant stock was up more than 80% since the earnings, however, the stock has sold off around 15% since then. Valeant stock has currently found support from its 50-day moving average. If last few earnings were anything to go by, Valeant stock could see strong movements after the earnings.
Whisper number of $1.01 indicates that Valeant could once again deliver an earnings beat. RBC's Douglas Miehm and Joel Hurren also expect the company to report a better than expected result. "Valeant reports Q2/17 results the morning of August 8th. We anticipate $2.25B in revenues, $911MM in Adj. EBITDA, and $0.98 in Adj. EPS. We believe this could be the first 'boring' quarter in a while for VRX and anticipate even a slight beat vs. consensus would lead to a positive reaction in the shares" they wrote in a note to clients. Investors will be watching out for commentary on debt reductions and asset sales. Valeant is also expected to update the guidance to include the impact of Dendreon sale.
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