Valeant Pharmaceuticals Intl Inc (VRX) is reducing its estimates and restating some earnings as reported last night by the WSJ. Shares are up 4% in pre-market trading on the news. As JPMorgan notes: VRX shares have been under pressure on a WSJ report around a potential upcoming earnings restatement, likely due to Philidor, and we wanted to offer some preliminary thoughts on the situation. While we do not have full clarity on the situation as of yet, the restatement would appear largely contained to legacy Philidor accounting based on the WSJ article, which we see as having limited to no implications to future Valeant results. If confirmed, the actual restatement, which would be confined to a small portion of the company’s 2014/2015 results, appears far less concerning than the headlines themselves.
Analysts react to the recent Valeant Pharmaceuticals news
Below more reactions from analysts on the latest Valeant Pharmaceuticals Intl Inc news:
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After a day a significant pressure due to uncertainty around the earnings release, culminating in a vague WSJ article about likely restatement of earnings related to Philidor, it appears the panic was all for naught. Last night, we saw clarification of the proposed “restatement” of revenues/earnings related to Philidor that seems to be nothing more than a timing issue on revenue recognition. VRX continues its Ad-Hoc Committee review (with assistance from independent auditors) of issues surrounding Philidor and is delaying filing of its 2015 10-K. However, it will be reporting unaudited financial results for 4Q15 on February 29 at 8am EST. Though the review is incomplete, we are encouraged by what appears to be immaterial negative impact to late 2014, offset by positive impact to 2015 results.
In our view, the shifting of $58mn of revenue ($0.10 of GAPP EPS) from 2H14 to 1H15 ($0.09 of GAAP EPS) is relatively benign and somewhat understandable, given the changes to the accounting of revenues through the Philidor channel after Valeant Pharmaceuticals entered into the option to acquire Philidor in December 2014 and began to consolidate Philidor’s financials; we highlight that Valeant stated, “no similar adjustments would be necessary for sales after that date.” That said, we believe the need to restate hurts management’s credibility, and we recognize that investor confidence in Valeant has been shaken since volatility began in 2H15. However, we view yesterday’s 10.7% decline in VRX shares (vs. +1.5% for the S&P 500) as overdone, in light of the benign nature of the expected restatement.
Incrementally negative. Valeant Pharmaceuticals reported 2014 revenues of $8.264Bn, and as such the misstatement accounts for less than 1%; hardly enough to support the channel stuffing claims that have been raised against the company. However, the EPS impact is almost 3.7%, and suggests that the Philidor revenues in question had a net margin of almost 60%. Clearly, Philidor was a very profitable operation for Valeant Pharmaceuticals, and replacing it with a volume-based strategy will be challenging, in our view. Moreover, unfortunately, we believe that these types of issues will continue to undermine investor confidence at a time when it is still fragile. The shorts continue to circle VRX, and buyers simply do not seem to have enough confidence to step in.
H.C. Wainwright & Co
Bearish viewpoints involve overly aggressive assumptions. While recent commentary surrounding Valeant Pharmaceuticals has focused on myriad statistics, we believe that in several areas these have involved setting parameters that appear unrealistic. For example, Valeant’s long-term debt position currently comprises tranches ranging from 5.375% to 7%, while bears have projected interest rates of 9 – 10%. This strikes us as overly harsh. Furthermore, while Valeant’s future effective tax rate may rise as a result of deferred tax liabilities, we find it implausible that the rate would increase to 30% or more going forward. Finally, when discussing goodwill impairments, we note that Valeant’s model for R&D intrinsically involves cutting inherently high-risk projects and that the firm should progressively allocate goodwill preferentially to those projects that it believes have the highest potential to yield a positive ROI. As such, given Valeant Pharmaceuticals’ product approval track record, with six NDAs approved in the last three years, we do not anticipate goodwill impairments to rise massively.