Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) is a favourite for growth investors. In the past five years, it has experienced double-digit earnings growth of at least 30% every year.
Yet Valeant’s share price fell 16% on Monday. When looking at a longer time frame, in a matter of two months it fell 34%. Is the decline an opportunity to get in or should shareholders bail out?
The business
Valeant is a global specialty pharmaceutical company that develops and markets prescription and non-prescription pharmaceutical products. The business focuses on dermatology, eye health, and other niche therapeutic areas that target growth markets.
Why the one-day 16% drop?
In the past few days, its share price has continued to fall. On Monday it fell more than 16%. The fall is largely because some politicians have been questioning Valeant’s price hikes on some drugs. For example, one politician highlighted that two of Valeant’s heart-drug prices were increased by over 200% and 500% the day Valeant acquired the rights to sell them.
The politicians aren’t just targeting Valeant Pharmaceuticals, but other drug companies as well. It’s just that Valeant was used as a concrete example of the drug-price hikes. So, other drug companies have experienced share price declines as well. Allergan PLC is an example. It fell by over 8% on Monday.
The negative headlines about drug companies is causing an industry-wide sell-off. Shareholders need to hang in there, and can take the opportunity to shop for attractively valued drug companies.
Valuation
After the 34% decline and at about $222 per share, Valeant is now priced around a price-to-earnings ratio of 16. This is a cheap multiple to pay for the kind of double-digit growth that Valeant is delivering to shareholders.
Just two months ago, Valeant’s market cap was $115 billion and today it’s under $76 billion. The means $39 billion was vaporized in two short months. This is a prime example that the market can be driven by fear.
Profitability
For the last decade, Valeant achieved high gross margins that oscillated between 65 and 73%. For the last year, it has stayed at the high end of the spectrum. Further, in the same period, it generated U$5.5 free cash flow per share. So, the company is highly profitable.
Debt
What may be of concern to investors is its debt levels. The higher the debt levels, the higher chance a company can go bankrupt. Valeant’s debt-to-cap is 80%. Also, in the latest quarter its debt-to-equity ratio increased by 64% compared with 2014.
In conclusion
Current shareholders should not sell in panic. In the short term, the market can act emotionally with no rationality. If anything, shareholders should re-evaluate their position to determine if they want to buy more shares at a more attractive valuation, or they could choose to add other drug companies that are also caught up in this sell-off.
Investors thinking of starting a position in Valeant Pharmaceuticals should evaluate the company because it is much more attractively valued than it was two months ago.
