Another day, another cycle of Valeant Pharmaceuticals Intl Inc (VRX) news – so why was the stock up 10 percent in today’s trading session? Because there is less risk the company will go bankrupt, investors believe after the company’s committee completed its review of Philidor . As Barclays states: Just ahead of the lender consent deadline tomorrow, VRX reached an important milestone with its announcement that the Ad Hoc Committee of the Board of Directors investigating Philidor-related matters had completed its investigation and did not identify any additional items that would require restatements beyond the $58M revenue adjustment previously disclosed. We think this gives the company some minor leverage ahead of tomorrow’s deadline for reaching agreement with creditors on amendments to its credit facilities. Completion of the Ad Hoc Committee’s work paves the way, but doesn’t guarantee, for the company to file its 10-K filing ahead of the April 29 deadline. This morning’s press release did not discuss other findings of the Ad Hoc Committee of interest to investors such as media reports suggesting VRX employees were placed on-site at Philidor and used alias email addresses (e.g., The Wall Street Journal, “Valeant and Pharmacy More Intertwined Than Thought,” 10/25/15).
Valeant Pharmaceuticals Intl Inc (VRX) analysts react
Positive. Our review of Valeant’s financial misstatements so far does not support the fraud allegations, in our view. Although the financial misstatements that have been disclosed so far are somewhat significant, we believe they do not paint a fundamentally different story for Valeant. If Valeant is successful at getting its 10-K filed in April, thereby preventing technical default on its debt, and the financial revisions outlined in the 10-K are similar to those that have been disclosed so far based on the work of the ad hoc committee, then we would argue that the stock could be on theverge of a significant inflection point. We argue that VRX is undervalued relative to what we believe are the underlying fundamentals; this is illustrated by our $66 price target, which is based on what we believe are the underlying fundamentals.
We believe that the Ad Hoc committee’s completion should help Valeant as it continues to work with its lenders to amend its debt terms. We note that we believe VRX was seeing push-back from lenders which would have led to higher fees and rates than proposed.
We believe that last night’s U.S. Treasury announcement is unlikely to impact Valeant as any debt that VRX holds is essentially third-party debt, not intercompany debt. Any inter-company debt is associated with third-party debt. In addition, based on the release, the announcement will applyto instruments issued after April 4th. As such, we do not believe VRX will be impacted by yesterday’s Treasury announcement as it relates to earnings stripping.
Given completion of the review, Valeant’s board is dissolving the Ad Hoc Committee, and will have the board’s 12 independent directors assume oversight responsibility for the remaining work related to the current and restated financial statements and disclosures, as well as the assessment of related internal controls and remediation matters. As a reminder, VRX previously outlined ~$0.09 of EPS that was improperly recognized in 4Q/14 (and will be instead recorded in 1Q/15).