Valeant Pharmaceuticals: No Fire Sale Expected, Says CreditSights

Valeant Pharmaceuticals: No Fire Sale Expected, Says CreditSights

Although Valeant Pharmaceuticals is facing scrutiny for its drug pricing and involvement with a controversial specialty pharmacy, analysts aren’t worried about it. The drug maker’s stock surged on Thursday following a bullish report from Citi Credit Research and is on the rise again today after another report from CreditSights, which states that there’s no need to worry that Valeant is facing liquidation danger.

Valeant worth $63 billion

CreditSights analysts place an enterprise value of $63 billion on Valeant Pharmaceuticals in its current state, based on a sum of the parts analysis. The valuation doesn’t include any fines the company might have to pay, but the firm states that even in the worst case scenario, which they say is in the $1.5 billion to $2 billion range, investors are still undervaluing Valeant by about $3 billion.

They’re not at all worried about liquidity and believe that if the company found itself forced to sell off some of its assets, it would find willing buyers, especially for the assets that haven’t been affected by the controversies regarding the specialty pharmacy distribution and pricing.

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They believe the Bausch and Lomb eye care business and the Salix gastrointestinal drug business are worth the most, out of all of Valeant’s many assets, noting that neither of the two businesses is affected by either the distribution or pricing concerns. Here’s a look at their valuations for the company’s main parts:

At the opposite end of the spectrum are the dermatology and neurology businesses, of which CreditSights has applied “haircuts” to their fourth quarter and full year estimates for revenue and EBITDA.

Valeant can manage the Philidor controversy

The analysts say the accusations Valeant faces in connection with its dealings with specialty drug pharmacy Philidor “appear manageable when compared to magnitude of wrongdoing in certain well-known pharma settlements. Among the examples CreditSights examined to come to this conclusion are accusations ranging from seven to 11 years. Sales in these examples added up to the billions.

Further, they say the business practices pertaining to the Philidor issues don’t appear to have endangered patients, unlike the examples they looked at. They believe that in the examples they looked at, the “magnitude of wrongdoing” in sale volume and length “far exceeds accusations against Valeant/ Philidor. They also don’t expect Valeant’s fine to be anywhere close to the examples they give.

For example, GlaxoSmithKline paid $3 billion in 2012 to settle charges of unlawful promotion of several drugs, including Wellbutrin, Lamictal, and Zofran, for off-label use, in addition to failure to report safety data on another drug and underpaying Medicaid rebates and paying kickbacks to healthcare providers who prescribed its drugs. The problems dragged on from 1999 through 2010. Sales of the affected drugs were nearly $28 billion during the period of the settlement.

Also Pfizer paid $2.3 billion in 2009 to settle misbranding charges for the drug Bextra, marketing the drug for off-label use, and unlawful promotion for three other drugs, in addition to paying kickbacks to prescribers. The violations occurred between 2001 and 2008, and Bextra sales were $2.4 billion between 2002 and 2005.

And Abbott Laboratories paid $1.5 billion in 2012 to settle charges of unlawful promotion of Depakote and use of a specialized sales force. The settlement covered violations between 1998 and 2006, and Depakote sales amounted to $2.2 billion in 2005 and 2006, CreditSights reminded investors.

Relative value for Valeant

CreditSights continues to rate Valeant as Outperform, saying that their thesis hinges on the drug maker’s strong free cash flow generation. They note that management is prioritizing delveraging and aims to use most of the cash flows from 2016 to reduce the company’s debt while the share repurchase plans will be put on hold for now. Also they will be limiting their usual merger and acquisition strategy to just “small, tuck-in opportunities.”

The firm noted that Valeant doesn’t have any “major maturities” until 2018. At that point, the company has $3.9 billion in term loans and senior notes coming due, and CreditSights says this gives their cash flow thesis time to play out. Also they say the company has a “healthy liquidity position,” which they say providers further buffer against any possible fines or settlements it may have to pay out in connection with the ongoing probes.

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