Valeant Pharmaceuticals International Inc. (TSX:VRX)(NYSE:VRX) is a classic story of a former investor darling that rose to astronomical heights only to come crashing down when reality set in.
Back in early 2015, Valeant’s stock price was flying high, but the company was also embarking on an aggressive acquisition strategy that even a debt to capital ratio of 70% and a debt to EBITDA ratio of over six times could not prevent.
While the strategy was working, the company was seemingly turning a blind eye to the risk involved and the lack of sustainability of this strategy. For the company and investors alike, it was all about optimism, it seemed. Yet the company’s bonds had been downgraded to junk bond status, with Moody’s giving them a Ba3 rating, which is three levels below investment grade, or speculative, and S&P rating the company at BB.
Let’s recall that the stock hit highs of almost $350 in mid-2015, only to experience a dramatic fall from grace as its pricing practices came under scrutiny. The company’s its heavy debt load threatened its survival, and the SEC launched an investigation.
By the end of 2015, the stock was pretty much worth half of what it was at its highs, and it subsequently continued to fall and settle at levels of between $20 and $40.
Let’s fast forward.
The stock is up more than 7% today and 38% year-to-date, as the market looks to be hopeful that the company’s turnaround will successfully bring it back into profitable growth mode.
But let’s not forget that an overhang on the stock remains in the form of an SEC investigation and investigations into its pricing practices.
The company’s most recent results, the third quarter of 2017, showed that revenue continued to decline year-over-year but also sequentially.
At $26 billion, the company’s debt level is still high for a debt to total capitalization ratio of a whopping 84%.
The plan makes sense. In order to manage its risk profile, Valeant will focus its R&D spending on niche products with less exposure to patent risk.
Investing in pharmaceuticals that have passed regulatory hurdles and have smaller niche markets also reduces the potential for competition from the big pharmaceutical companies, which tend to focus on bigger market drugs.
While in theory we would all love to invest in a Canadian healthcare stock, Valeant’s risk profile is too high in my view.
And while the shares appear cheap on a multiple basis, trading at only seven times this year’s expected earnings, the multiple is reflecting the aforementioned real risks that overhang the company.
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Fool contributor Karen Thomas does not own shares of Valeant Pharmaceuticals. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.