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Is Valeant a Good Bet on a Price-to-Earnings Basis?

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Valeant’s PE multiple

On August 11, 2016, Valeant Pharmaceuticals (VRX) was trading at a forward PE (price-to-earnings) multiple of ~3.0x. Valeant is trading at a significant discount to specialty pharmaceutical peers Perrigo (PRGO), Endo International (ENDP), and Mallinckrodt Pharmaceuticals. (MNK). PRGO, ENDP, and MNK were trading at forward PE multiples of ~10.0x, ~4.4x, and ~8.0x, respectively, on the same day.

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Although the entire specialty pharmaceutical industry is facing pricing challenges in the United States, the drop in Valeant’s valuation multiple has been significant over the past year. Higher debt, questions about business model sustainability, controversies associated with various practices, and irrational price hikes have caused turmoil for Valeant. For details on Valeant’s inorganic growth business model, please read Valeant: The Rise and Fall of a Giant Specialty Pharmaceutical.

Valeant’s average and median forward PE multiples over the past year stood at 5.5x and 5.1x, respectively. The current forward valuation multiple of 3x is at a higher discount.

What might be catalysts for Valeant?

Recovery in the dermatology and gastrointestinal portfolios will be a major catalyst for Valeant. The prescriptions for its major drug Xifaxan are improving. Read Xifaxan: Valeant’s Secret Weapon? for more details about the drug. Valeant’s debt reduction focus, along with resumed growth of key drugs, might return investors’ lost faith in the company.

Meeting the 2016 revenue guidance might prove to be another catalyst at the end of 2016. Despite lower revenue in first half of 2016, VRX plans to meet its guidance. Read How Does Valeant Plan to Meet 2016 Guidance? to learn about its strategy to meet guidance.

If you invest in the VanEck Vectors Pharmaceutical ETF (PPH), you can diversify exposure to Valeant. PPH invests ~2.0% of its holdings in Valeant. Continue to the next part of this series for details on Valeant’s lead drug, Xifaxan.

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