Valeant Pharmaceuticals: Worth At Least $30

When investors look back at the history of Valeant Pharmaceuticals�� (VRX) turnaround, they will remember May 8, 2018. Management��s earnings call for the first quarter is an inflection point for the company as the company builds on revenue growth and higher profits. The company has three catalysts that will lead the stock to a minimum $30 share price. That is, a forward P/E multiple of at least 8 times on sales growth of between 15 �� 20 percent, annually.

1) Management

Valeant��s new management team is suited to lead the company through the transformation process. It is not run by managers who mislead investors through deceptive earnings numbers during the quarterly conference call. The company has 20,000 dedicated staff that is working hard to reinvigorate drug sales growth. More specifically, the company appointed Mark McKenna from B+L to lead the Salix sales team. I previously noted the need for Salix having strong leadership in this area, and McKenna did not disappoint. The executive restructured the sales team to drive XIFAXAN sales, a drug indication for IBS-D. Before that, Salix suffered from high turnover. Moreover, Salix was not calling on primary care physicians to prescribe the drug to patients. With this new leadership, staff turnover slowed and the sales force successfully boosted XIFAXAN prescriptions up 7 percent year-on-year in the first 13 weeks of 2018.

In the first quarter, Salix grew revenue by 10 percent organically over last year. Bausch + Lomb��s revenue also grew 10 percent. The growth is attributed to strength in the Global Vision Care, International Prescription, and Global Surgical units. As shown in the slide below, Valeant��s top-10 products grew by over 20 percent year-on-year:

Source: Valeant Pharmaceuticals

The revenue potential for the drug does not end there. Salix will invest in studying new indications and new formulations of rifaximin. Further, the company enrolled over 300 patients for a Phase 2 study for treating acute overt hepatic encephalopathy.

2) Product Line-up

Thanks to a rejuvenated sales force, XIFAXAN will continue to drive Salix��s turnaround. Plus, chances are good that Teva Pharmaceuticals (TEVA), through its acquisition of Actavis, will not have an approvable XIFAXAN ANDA. The strong patent protection and intellectual property position ensure Valeant will enjoy profit growth from sales through 2029.

VRX data by YCharts

Above, quarterly earnings report gave both TEVA and VRX stock a lift.

3) New Products

The 44 percent Y/Y growth in prescriptions for Relistor imply meaningful demand ahead for the product. In dermatology, SILIQ is a clear potential for contributing to growth but management is not breaking down sales numbers at the quarterly level. Unfortunately, despite the competitive pricing, SILIQ is likely lagging in sales due to the black box labeling. As a biologic, the drug must be injected (210mg/1.5ml in a single-dose, prefilled syringe). By comparison, patients on Regeneron��s (REGN) Dupixent take an injectable 300mg dose.

Psoriasis suffers are most accustomed to topical ointments. Currently, steroid ointments are taken for no more than two weeks at a time and do not need needles. So, Valeant��s DUOBRII, an ointment-based drug, is another psoriasis drug that could give the company meaningful sales growth. The PDUFA date is coming up next month. BRYHALI, another drug for psoriasis patients, has an October 5 PDUFA date. Both events could give VRX stock a boost. Valeant stock closed at $22.14, a level not seen since the start of the year.

Valuation and Takeaway

While the average price target on Valeant��s stock is $17.12, well below the $22 closing price, value investors should perform their own number crunching in a finbox.io model to arrive at a fair value. Assuming revenue growth picks up in FY 2020 through to FY 2022 in the range of 0 �� 5 percent. Annual revenue would be between $8 billion - $9 billion:

Source: finbox.io (click on the link to enter assumptions)

Assuming a steep discount at between 10 �� 12.5 percent, VRX stock would have a fair value of around $30 a share. Valeant, or (under its new name in July) Bausch Health Companies Inc., clearly has upside higher than that. But just as Teva is deeply undervalued at 7.6 times forward P/E and trading at $21 a share, Valeant��s fair value will rise as the company rolls out new products and continues reporting a strong quarter. Q1 is only a start and investors holding the stock will grow accustomed to strong results ahead. With that, I will raise my $30 price target accordingly.

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Coverage on Valeant stock began in 2015 (as a 'sell'). The stock was added as an investment for DIY Value Investing marketplace members.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TEVA, VRX, REGN over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.