Valeant Pharmaceuticals shares rallied today, climbing by as much as 7.07% to $100.40 per share. Goldman Sachs and BTIG analysts downgraded it, while other firms cut their price targets but remain Buy-rated on the controversial stock.
Short-seller backs down on Valeant accusations
It appears as if short-selling firm Citron Research’s pullback on comments about Valeant Pharmaceuticals may be the reason for today’s share price increase. The battleground stock has attracted the attention of heavyweights like Bill Ackman and Warren Buffett’s partner Charles Munger, with Ackman backing it and the Munger siding with Citron and going on the attack.
The Wall Street Journal reported that Citron’s Andrew Left was backing down on his allegations against Valeant Pharmaceuticals, which he previously compared to Enron. He had previously said that he would release another scathing report on the company today, but after speaking with his lawyer, he realized that he didn’t have a high enough conviction level on what he was going to release.
ValueWalk has obtained a copy of Left’s latest report, which states: “We are not dialing back our warning on Valeant … We are dialing back the focus on Citron to investigate and report the vast spectrum of claims now piling up against Valeant.”
Valeant Pharmaceuticals downgraded for reputation
Analysts from multiple firms have been weighing in on Valeant Pharmaceuticals since the controversy began. In a report dated Nov. 2, Goldman Sachs analyst Gary Nachman and his team downgraded Valeant from Buy to Neutral and cut their price target from $180 to $122 per share. Their confidence in the company is lower now because of all the recent problems the company has had. They don’t think investors will “reward” Valeant unless management provides more clarity on how they will handle all of the reputational problems and move it toward growth again.
In the long term, Nachman still thinks Valeant’s fundamentals might deserve a “much higher valuation,” but what’s unclear for right now is the risk/ reward. He also expects the road to recovery to be much longer than he had previously thought it would be.
Why Valeant earned a downgrade from Goldman
He was surprised that investors weren’t happier with the company’s decision to cut ties with Philidor and thinks the bearish reaction indicated that investors are worried that its troubles might spill over to other areas. Philidor was accused of being a “phantom pharmacy” to artificially raise the prices of drugs. After losing Valeant’s CVS Health’s and Express Scripts’ business, the pharmacy announced that it will cease operations.
Also he sees greater risk for the company with doctors and patients because of the reputational damage and believes it will take “at least a couple of quarters of execution” to understand the full impact. Further, he notes that Valeant’s problems extend beyond its reputation as the biopharma and healthcare industry as a whole has contracted significantly. He thinks investors have plenty of other options for stocks in the sector which have “attractive valuations” without the problems Valeant has—whenever new money returns to the sector.
BTIG also downgrades Valeant
Last week BTIG analysts Timothy Chiang and Ben Shim also downgraded Valeant to Neutral, citing uncertainties with the company’s business practices. They think management will have to overhaul those practices, which could negatively impact future sales, profits, and cash flow. They also think the clarity into the problems has gotten worse and that they will remain on the sidelines until they know how bad the situation really is.
No evidence of wrongdoing: Canaccord Genuity
Canaccord Genuity analyst Neil Maruoka and his team slashed their target price for Valeant Pharmaceuticals from $190 to $170 per share, but they continue to rate the stock as a Buy. They don’t think there has been any evidence of wrongdoing on Valeant’s part, but they note that in situations like this one, things usually get worse before they get better. They also remind investors that almost all major drug companies have faced numerous government probes and paid sizeable fines. And while sometimes it takes time for the stocks to recover, they think Valeant still presents a solid long term opportunity.
Jefferies analyst David Steinberg and his team also slashed their price target for Valeant, pushing it from $224 to $172 per share but also maintaining their Buy rating on the stock. They applauded the decision to dump Philidor but added that the drug maker could remain in the “penalty box” until more detains become clear.
They note that there are still many questions, like when management learned of problems at Philidor. The Jefferies team also said regulators may deepen their investigation of Valeant as they had already been investigating other issues with the company. However, they believe more clarity on the problems will improve sentiment even though it could take some time for the overhangs to clear up.