Valeant Has Tons of Upside Potential

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Valeant (NYSE: VRX) is a strong buy posting four straight positive earnings.  Valeant Pharmaceuticals is a specialty drug company developing products in the areas of neurology, dermatology and branded generics.  One of its strongest drugs is Wellbutrin XL to treat depressive disorders.  Xenazine, for the treatment of chorea associated with Huntington’s disease, is another great product produced by this company.

Other drugs in its arsenal are CeraVe to rebuild and repair skin barrier and Kinerase, a cosmetic product.  The company was founded in 1960 and was formerly known as Biovail Corporation.  The name is now Valeant Pharmaceuticals International changing in September 2010.  It is headquartered in Montreal, Canada.

In early May, Valeant reported revenues of $856 million, up from $565 million reported a year ago.  This was a whopping 55% increase.  Evaluating the price and consensus charts show a stock that was ahead of estimates throughout most of 2010 and 2011.  This is a good indication that the stock will likely continue on a higher trend for several quarters.

Valeant’s market cap sits at about $16.23 billion. Shares trade at an average of $47.1 with a P/E ratio of 15.9 and P/S ratio of 6.6.  While this stock year to date is lagging the S&P 500 advancing just over 2% compared to the S&P 500’s rise of just under 5%, there appears to be some insiders who feel optimistic about the company. 

Valeant seems to be outperforming on many levels.  Shares are trading at 10-11 forward P/E and 3.6 P/B.  This stock is a discount to the averages of 12.1 and 4.3 if comparing to its peers in the pharmaceuticals industry.  Decline in shares being off of the highs in May is probably due to the market mayhem in May, and insider buying could be noteworthy and worth a further look.

ValueAct Capital, one of the company’s largest investors, purchased 850,000 shares of Valeant at prices between $47.16 and $48.75 over a four-day period between May 17 and May 21 .  Valeant Director Laurence Paul also bought 5,000 shares on May 14 and 5,000 additional shares on May 18.  CFO Bradley Schiller snatched 9,000 shares in March.  It appears insiders are confident about the stock’s upward rise.  Reuters pegs the price target at $61.88, indicating an upside of 29.62%.

Insiders generally buy company shares for just one reason, they expect the share price to rise.  Insiders usually have a bird’s eye view of what is really going on in a company and are privy to information we may not have as investors.  Keeping an eye on their activity can often give us insight.  While this may not always be an accurate assessment, on average, insider purchases tend to outperform the market in the 12-month period following the transaction.

The pharmaceutical industry as a whole seems to be on the rise as similar stocks saw insider trading as well. Celgene (NASDAQ: CELG) which develops therapies to treat cancer and immune-inflammatory diseases by regulating cells, genes and proteins, saw the CFO, Jacqualyn Fouse, snatching up shares. Questcor Pharmaceuticals (NASDAQ: QCOR), an integrated specialty company focusing on the development, acquisition and marketing of innovative, acute care drugs also saw its CFO, Michael Mulroy, purchasing additional share as well. 

Valeant’s acquisition strategies seem to be an important part of the equation.  Growth in the dermatologic arena is strong.  Valeant recently purchases two companies, Dermick and Ortho Dermatologics and also is acquiring AB Sanitas, boosting its sales in Eastern Europe.  The purchase of iNova will benefit its business in Australia.

Valeant also announced it will acquire certain assets from Swiss Herbal Remedies Limited, a nutraceutical company that manufactures and markets a broad range of scientifically formulated vitamins, minerals and supplements.  The transaction will close in June.  The herbal company already has strong brand awareness in Canada and will be a perfect fit with Valeant’s current operations.

Mega company, Johnson & Johnson (NYSE: JNJ), has been a long time favorite of big cap stocks.  Much of Johnson & Johnson’s current focus has been on its acquisition of Swiss orthopedics maker Synthes.  The $21 billion dollar deal is the largest one-time transaction in the history of Johnson & Johnson.  This deal provides the company with a substantial, global presence in the orthopedic arena.  The logic makes sense as roughly 10,000 baby boomers reach their 65th birthdays every day for the next twenty years.  Baby boomers are a market to be reckoned with as they insist on maintaining their active lifestyles.

When it comes to a secure stable company,  you can’t beat a gamble on Johnson & Johnson.  However, Valeant, a midsized pharmaceutical company is worthy of your consideration.  It virtually has no patent expiration issues for the next five years.  Even more outstanding is that the company is seeking growth through acquisitions that are enhancing its offerings. Earnings for the first quarter of 2012 were up 16%.  This reflects a $0.99 per share increase.  Acquisition enhanced revenues are up 52% for the first quarter versus a year ago.

Its proprietary drugs, Acanya, Atralin, and Zorivax all grew by double digits in 2011 and the company’s acquisitions are establishing a solid pipeline of drugs.  I believe the company offers a strong long-term growth potential. 

Another competitor to consider is Vertex (NASDAQ: VRTX), which currently has eight products in its pipeline.  One drug in phase 2 trials and two drugs in phase one trails are targeting hepatitis C.  Two drugs in phase 2 trials are looking at cystic fibrosis.  One drug in phase two is for the treatment of epilepsy.  Another drug in phase 2 trials is exploring immune-mediated inflammatory disease. A final drug is targeting influenza.

Vertex is outstanding because it continues to grow by acquiring other companies that add to its diverse offering of drugs.  Its track record to date in acquisitions has been right on target.  The company does carry a $6.6 billion debt.  The debt however is manageable and does not significantly impact its cash flow capabilities.  Operating cash flows are close to $700 million per year.

jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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