If you look at Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) the way I do, you likely feel equal parts greed and terror. On one hand, you see a stock that is trading at under $16 a share, when a year and a half ago, it was trading over $335 a share, so you dream of it returning to those sorts of prices. But, on the other hand, you’ve got a company carrying nearly US$30 billion in debt; if the company were to go into bankruptcy, investors would be left with nothing.
So, what should we do? Is the potential reward worth all the risk associated with Valeant?
It all depends on how the company does managing that debt going forward. Valeant owes US$2.6 billion in 2018, US$1.1 billion in 2019, US$7.7 billion in 2020, and US$3.2 billion in 2021 — not to mention the US$13.3 billion due in years following. In the next four years, Valeant has to pay US$14.6 billion, which is a huge mountain of debt for any company to overcome, but it’s especially concerning for Valeant because its revenue is dropping.
In 2015, Valeant had US$10.4 billion in revenue, but by the end of 2016, revenue dropped to US$9.6 billion. And, as is expected, the company had a significant net income loss of US$2.4 billion. But cash flow is what matters right now with regard to ensuring that its debt payments can be made and, for the most part, this is relatively constant. In 2015, Valeant had US$2.257 billion in cash flow; in 2016, cash flow dropped 8% to $2.087 billion. No one likes to see that happen, but there were also some asset sales that contributed to a reduction in total sales.
The question is, Can it manage that debt? The company paid down US$1.1 billion of its debt earlier this week thanks to some asset sales announced back in January. But, just as important, Valeant is looking to refinance some of that debt to hopefully make it more manageable. Remember, Valeant owes US$14.6 billion over the next four years. That’s a lot and doesn’t give the company much time to work on its turnaround strategy. Growth is possible at Valeant, but not with so much debt coming due in a few years’ time.
The company is hoping to refinance all of its loans that are due between now and 2022 and push them later. There are positives and negatives to this strategy. On the one hand, pushing debt out tends to make it more expensive, so theoretically, more interest will be charged (and interest rates are going up). On the other hand, this strategy will give the company some wiggle room, so it can execute its business plan. While there is no guarantee that this refinance will occur, I think it’s a generally positive step for the company.
You’re likely scratching your head and questioning whether you should buy Valeant or not. The answer is both yes and no. Valeant owns plenty of incredible assets that, when they reach scale, could generate growth. But it has a tonne of debt, which will hold it back until it is paid off. If you’re going to invest here, understand it’s a speculative trade. You could make a lot of money, but you could lose it all in liquidation. Tread carefully.
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Fool contributor Jacob Donnelly has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.