Valeant Earnings: The 2017 Bill Comes Due

(Bloomberg Gadfly) -- Valeant Pharmaceuticals International Inc., long the sick man of the pharma world, actually had a decent 2017.

It chipped away at its massive debt pile, pushed some debt obligations into the future, and stabilized parts of its business. But Valeant's 2017 results and 2018 guidance, released Wednesday morning, illustrate we still don't know when its long-promised turnaround will arrive -- or where its bottom will be.

Even as it sold businesses throughout 2017 in order to pay down debt, Valeant consistently maintained Ebitda guidance -- encouraging for a company that once habitually slashed targets. It delivered on that guidance Wednesday, albeit at the low end of its range. 

But Valeant's 2017 results owed largely to some of its older medicines facing slightly less competition than expected -- not to especially good performance of its own. Excluding currency impact and divestitures, the firm's Bausch & Lomb/International unit grew by 4 percent last year. But its branded drug and "diversified product" segments declined by 8 and 12 percent, respectively. 

Valeant's problems weren't averted, just pushed into the future. The company's 2018 projections of $3.05-$3.2 billion in adjusted Ebitda and $8.1-$8.2 billion in revenue missed analyst expectations. They reflect more than $1 billion in lost revenue from divestitures and discontinuations and competition for older drugs.

Valeant touted its progress on stabilization and debt reduction on its earnings call Wednesday. But as Edison Director of Health Care Research Maxim Jacobs highlighted on Twitter, the firm's debt-to-Ebitda ratio hasn't actually moved in the past year. Though the company doesn't have to pay down significant debt until 2020, its leverage will continue to hang over it. 

A return to growth hinges on how well Valeant manages the decline of its older medicines and on the rest of its business producing enough revenue to outstrip those losses. There are risks on both fronts, regardless of what optimistic but utterly worthless Y-axis-free charts from the company's slide deck might have you believe. 

Valeant projected that two of its 10 best-selling products -- Apriso and Uceris -- will face generic competition some time between the second half of this year and 2019. The firm has been relatively fortunate with the pace of generic entry recently, but given the FDA's new emphasis on getting competitors on the market for older drugs, it's risky to assume that will continue. 

Valeant can likely expect only modest growth from its Bausch & Lomb business, its largest unit. An uncomfortable amount of growth will have to come from uncertain new products -- and the company has a limited track record of developing and successfully launching novel drugs. It has a small R&D budget and lacks an industry-leading pipeline. It's doing its best with the remnants of acquisitions made by prior management, which weren't always based on product quality. 

The dermatology business will be key. Executives promised to double its sales over the next five years, which seems like a big ask, even with its recent weak performance. Valeant said payers have scrutinized its legacy products, putting downward pressure on prices and sales volume. Those same pressures will absolutely hold true for new drugs as well, and not just in dermatology. The firm will remain relatively constrained in its ability to put resources behind drug launches. 

Valeant insists 2018 will be its "trough year." An admission that the trough is extra deep is not a promising start. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.

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