Valeant Pharmaceuticals’ Black Tuesday is over and a new day for the company begins as some are now questioning its very survival. We posted a good summary of everything you need to know about Valeant yesterday, now comes the sell-side analysts quickly trying to play catch up and downgrade the stock. Below are some excepts from analyst reports out this morning:
Valeant Pharmaceuticals – analysts react
Material guidance revision leads to default concerns. While there were multiple issues to concern investors when VRX reported Q4/15 results, we believe the overarching one that disturbed investors was the
potential of default on its sizable debt position. We thought that we had made conservative reductions in our outlook in our preview note, but there were significant incremental issues. These primarily related to new managed care contracts and inventory destocking; obviously, of the two, the managed care contracts and related reduction in prices arethe more notable items, as they have a sustained effect on earnings.
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We reduce our 2016 revenue estimate from $12.2B to $11.2B, our EPS estimate from $12.60 to $9.39 (we note that this includes an increased effective tax rate – no change to cash tax), and Adj. EBITDA from $6.6B to $5.6B. We remain on the sidelines at present given lack of visibility even though we think valuation is approaching attractive levels. In terms of next key events, we would like to see: (i) debt covenant amendments (2–3 weeks); (ii) Ad Hoc report (by mid-Apr potentially); and (iii) filing of the 10K (by end of Apr). Only then would investors likely gain the comfort to reapproach the shares in our view.
Valeant Pharmaceuticals released long-awaited 4Q15 results with 2016 guidance revision that was far below expectations. Guidance was reset to $11.0-11.2bn (from $12.5-12.7bn, Cons. $12.4bn) with EBITDA of $5.6-5.8bn (from $6.9-7.1bn, Cons. $6.67bn) and EPS of $8.50-9.50 under new tax reporting (from $13.25-13.75, Cons $13.27). This was impacted by continued inventory destocking in Dermatology and unexpectedly in GI, along with additional pressures in various businesses and new MCO contracting to rebuild relationships. The significantly tempered outlook was in sharp contrast with any tangible metrics we had (likely due to significant concessions made to payers to improve its standing), and prospects for its growth potential are still murky at best. Clouding the issue still are the outstanding internal/external audits and 10-K filing, covenants, and debt load relative to growth and cash flow uncertainties. Though we are in the midst of a “crisis of confidence” and uncertainty could yield more downside in the near-term, the company is still left with strategic value. We put this break-up value at $65.
Can the Co Deliver? Debt Reduction Likely the Best Way to Increase Equity Value: VRX is now only planning to retire $1.7B in debt in FY16 (vs $2.3B), hence the co is open to more questions about its ability to repay lenders, avoid breaching covenants, etc. As such, the shares trade at just ~3.5x FY17 EPS. Our credit strategist believes the debt issues are readily addressable, though some will argue the co has major structural issues. All we can point to is 3rd party data (e.g., IMS Rxs) as evidence the co is real. Arguably the best way for VRX shares to recover is for mgt to take a real chunk out of the outstanding debt.
Cutting Valeant Pharmaceuticals PT; maintaining Equal Weight rating. In the wake of negative business developments, a weaker financial outlook, management challenges, and 10K uncertainty, we are lowering our Base Case PT from $98 (‘17E EV/EBITDA multiple of 8.5x est EBITDA of $7.2B) to $39 (7.0x new est. ’17E EBITDA of $6.1B). Given the high volatility and risk in the stock, our Bull/Bear range remains wide – see next section for details.
We are downgrading Valeant Pharmaceuticals shares to Neutral from Buy and reducing our DCF-based target price to $60 from $175 following a far more significant reduction in 2016 guidance than we had anticipated. We admit upfront, we have been humbled by our stock call on VRX, which we have defended despite the continuing spate of bad news, as we believed that despite the noise surrounding the company, much of the fundamental businesses had been performing well. Despite the fact that our new PT for $60 represents 79.1% potential upside, we do not expect VRX shares to outperform the market near term, as we have lost confidence in management’s ability to understand its own business and to provide reliable guidance. We no longer have the required conviction to rate VRX a Buy and are thus moving to the sidelines.
What did we learn from today’s call? We left VRX’s update with more questions than answers, with 2016 guidance implying much less healthy fundamentals than we had anticipated. While parts of guidance
do seem conservative (potential cost cuts, slower growth in areas like GI that appear to be showing healthy IMS trends), this is balanced by uncertainty on core business trends (managed care contracting, pricing) as well as channel inventory reductions that will likely continue to cloud near-term results. Despite the reduced outlook, we believe these steps were probably necessary to reset consensus, and guidance appears to reflect an achievable set of metrics for the remainder of the year.
In the context of significantly lower forward guidance provided yesterday, we are lowering our price target on the firm’s shares from $150.00 to $118.00 per share. On yesterday’s update call, Valeant management
instituted forward 2016 guidance of $11.0 – 11.2B vs. its prior 2016 guidance of $12.5 – 12.7B, originally provided in December 2015. The firm indicated that it anticipates 2016 EBITDA to be in the $5.6 – 5.8B range, reduced from $6.9 – 7.1B. We have instituted projections of $11B in revenue for 2016, rising to $12.9B in 2017 and $14.5B in 2018, vs. our original revenue expectations of $12.7B in 2016, $14.3B in 2017 and $15.6B in 2018. Our EBITDA projections likewise fall to $5.9B in 2016, $6.1B in 2017 and $7.2B in 2018, vs. the original estimates of $6.8B for 2016, $7.1B for 2017 and $8B for 2018.
The weak guidance was likely the last straw for many investors, underscoring the numerous risks that we had highlighted in our recent downgrade. Further, the threat of default on Valeant’s debt raises additional questions about what is behind the delayed 10-K filing. Although there may be value in Valeant’s business, until larger concerns are addressed, we expect the stock will continue to trade at a substantial discount to peers.
Our continued Neutral rating and reduced price target reflect a view that the current discount to peers on VRX’s updated guidance is appropriate (>7x EV/EBITDA vs. group at ~9-10x) pending greater clarity on several critical issues. Guidance appears to have come together at the last minute, incorporating rapidly evolving pressures on pricing and customer relationships beyond what is evident from outside data sources. Whether guidance is truly conservative this time will need proof, but despite a lack of clarity on some assumptions, guidance seems the best available base for valuation. Our forecasts are unchanged as we assess how a ~$1.3 bln EBITDA reduction translates into impacts on each of VRX’s businesses.