This commentary originally appeared on Real Money Pro at 10:00 on March 29. Click here to learn about this dynamic market information service for active traders.
Valeant Pharmaceutical's (VRX) soap opera continued Monday. The stock fell another 7% to open the week, as its just-dispatched CEO was subpoenaed to testify before the Senate Special Committee on Aging on April 27. The committee is one of two investigating aggressive drug pricing, which has become a hornet's nest and a focus area in front of the upcoming election year.
Valeant had already lost more market value from its peak than did Enron. The company has become a huge headache for hedge fund manager Bill Ackman, whose fund has a huge stake in this one-time market darling and has become its most ardent advocate. He recently took a board seat as well.
I have no stake in Valeant and I think you could make a case the stock price will be either $10.00 or $100.00 a year from now, depending on how all of its issues are resolved and what prices it can get for key assets, should it go down that route to shore up its balance sheet.
Although this tragedy is fascinating to watch, I think the investment opportunities are in the selloffs in some of the large drug makers that this debacle has triggered, or at least play a key role in some significant declines.
This is especially true for two of the largest generic drug makers in the world, Mylan (MYL) and Teva Pharmaceuticals (TEVA). Teva actually tried to buy Mylan early in 2015 for over $80.00 a share, which Mylan successfully rebuffed, to the consternation of a good portion of their shareholder base.
Mylan was then in turn rejected by Perrigo Group (PRGO) before settling on taking over another European drug manufacturer named Meda for some $10 billion including debt. Although this acquisition triggered a nearly 20% pullback in the stock, the deal was accretive and got Mylan deeper penetration in some key markets outside of the United States.
Instead of buying Mylan, Teva ended up agreeing to buy the generics business of Allergan (AGN) for just over $40 billion, a deal that still is in the process of closing. Both firms are very diversified, have become cheap after dropping approximately 30% from their 52 week highs and have solid balance sheets. Neither relies on price hikes, like Valeant did, as a core component of their business models.
Mylan should see earnings growth of 10% to 15% this year, and that growth should accelerate next year on the Meda acquisition, which has triggered an approximate $0.40 a share consensus earnings boost since it was announced. Mylan is extremely cheap at under 8x fiscal 2017's projected earnings per share.
2016 will be a transitional year for Teva, as it consolidates its huge purchase and earnings should only rise some 5% this year, which should accelerate to 10% growth in fiscal 2017. The company stated in the comments that accompanied its 2015 full year results that it believes it can achieve 20% average annual free cash flow growth from 2015-2018.
The stock is definitely in the bargain bin, selling at just 10x earnings, with a dividend yield of 2.5%.
Read more about the Valeant saga here: