Valeant Pharmaceuticals (NYSE: VRX) announced some good news in its second-quarter update on Tuesday. The drugmaker now expects to cut its debt by $5 billion sooner than its previous target of February 2018. Valeant was also able to highlight rebounding sales for gastrointestinal-disease drug Xifaxan.
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But while Valeant reported some positives, there was plenty in the company's update that continues to be of concern for investors. Here are five things management said in the company's second-quarter conference call that suggest the situation is getting worse for the drugmaker. (Quotes from S&P Global Market Intelligence.)
1. The full impact of LOEs is coming
While Valeant took a hit from loss of exclusivity (LOE) for several products in the second quarter, the worst is yet to come. The company continues to project $120 million more in revenue during 2017 than it originally estimated earlier this year, as a result of some products that didn't lose exclusivity as quickly as expected. However, loss of exclusivity won't be delayed forever.
Valeant CFO Paul Herendeen didn't give guidance for 2018. However, he readily admitted that LOE will hurt next year: "[M]ake no mistake -- those [LOE products] are going away in 2018."
2. Dermatology is still struggling
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Valeant's dermatology revenue was down 30% year over year in the second quarter. Sales for the company's dermatology products also declined 32% from the first quarter of 2017. Herendeen acknowledged that Valeant hasn't been able to deliver on its expectations so far with the unit.
There are some positive signs. Herendeen noted that "realized net selling prices seem to have stabilized, and the most recent prescription data trends suggest that we are regaining traction with our promoted brands." However, it doesn't appear likely that Valeant's dermatology unit will turn the corner anytime soon. The company cut its revenue outlook for 2017 primarily because of lower expectations for its dermatology business.
3. Divestitures also have a downside
There's no question that Valeant's sales of non-core assets, including Dendreon, iNova, and Obagi, helped the company reduce its debt. That's a big positive. However, divestitures also have a downside -- one that Valeant will soon begin to experience more deeply.
The company's second-quarter results reflected a negative impact on revenue and earnings from divestitures that have already been finalized. Valeant maintained its full-year 2017 EBITDA guidance even with the Dendreon sale closing recently. Herendeen, though, stated that divestitures will be a "growth drag" in 2018.
4. New products won't be overnight successes
Valeant is banking on having several new products help alleviate some of its problems. "The very clear direction we have is going to be to grow this business as a result of launching new products," CEO Joe Papa said. He specifically mentioned Siliq, Valeant's psoriasis drug that launched in July.
The problem, though, is that these new products won't be overnight successes. Valeant projects incremental revenue of $100 million from new products in 2017, including Siliq. That's not bad, but it's also not nearly enough, nor is the boost coming quickly enough to make up for the company's declining sales from LOE products and continued dermatology woes.
5. The clock is still ticking on debt
It's great that Valeant thinks it will cut debt by $5 billion sooner than originally promised. However, the company still will have roughly $27 billion in debt -- and the clock is ticking on when some of that debt reaches maturity.
Valeant must deal with $5 billion in debt maturities in 2020. That might seem like a long time off, but it really isn't. The company hopes to use cash flow, senior secured leverage, and proceeds from the sale of non-core assets to reduce its debt. But that could be easier said than done. Herendeen said that while it's not what Valeant would prefer, the options of raising cash through an equity offering or "reissuing equity-linked-type securities" could be on the table, if necessary. Valeant's huge debt will likely continue to be a thorn in the company's side for a long time to come.
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