Barron's Report: Valeant Pharma (VRT) Bets Big On New Epilepsy Drug

Valeant Pharma (NYSE: VRT) is looking for a successor to its royalty cash-cow antiviral drug Ribavirin and Epilepsy drug Retigabine seems to be the answer. Valeant, along with partner GlaxoSmithKline (NYSE: GSK) has recently submitted the drug for regulatory approval. Investors seem to have a positive view of the drug and thus Valeant’s share price has doubled since March and is currently trading at 34. However, investors might be over-optimistic about the epilepsy drug.

Valeant Pharma spent a fortune developing Ribavirin and had to settle a number of civil cases against it. Ribavirin proved its worth as treatment for Hepatitis C and generated a quarter of Valeant’s total profits. However, now royalties from Ribavirin are drying up as more and more generic versions of the drug have flooded the market. Revenues from Ribavirin are also decreasing due to expiry of country-specific deals.

Valeant expects Retigabine to step into Ribavirin’s shoe, which seems like an uphill task. Retigabine will have to face tougher challenges as the epilepsy drug market is already saturated. Nonetheless, Retigabine has an edge over other drugs as it uses Potassium ions to regulate the brain cells, controlling excitability. The drug has already garnered informal approval from Medical professionals.

Despite the euphoria surrounding the drug, it will be difficult for Retigabine to replicate Ribavirin’s success. Prescription-drug insurance plans are pressing their patients to opt for generic drugs and this is expected to have negative impact on name-brand drugs such as Retigabine. Any such failure of Retigabine may send the Valeant’s share price on the downward spiral. Valeant Pharma’s shares are already trading at a very high multiple. Its current share price is at 10 times trailing 12-month's cash flow which makes it almost 50% pricier than other pharma companies. If Retigabine does not garner the premium multiple of Ribavirin, Valeant’s stock price may decline by 30%.