Valeant Pharmaceuticals faces numerous uncertainties right now with pending investigations and its former link with controversial specialty pharmacy Philidor. Although it’s still impossible to know what will happen to the drug maker right now, Deutsche Bank analysts Gregg Gilbert and Greg Fraser gave a couple of suggestions about what could be in the future. They suspended their coverage of Valeant recently, and they still don’t have a rating or price target on the company because of the cloud of uncertainty that looms over it.
The drug maker is currently dealing with numerous financial restatements in process, a delayed 10-K filing, a board investigation into the dealings with Philidor, and items related to its accounting practices. The DB team questions whether Valeant can grow in its current position and beat its debt obligations.
A “revenue haircut” for Valeant
The DB team looked at some possible scenarios for Valeant Pharmaceuticals’ future under new management and thinks the most likely case is a “revenue haircut” paired with an increase in spending. They believe the company can meet its debt obligations “with some cushion in flat to modest revenue growth scenarios, although not in a case in which revenues decline.
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Their base case assumes “more conservative starting points for 2016 relative to VRX’s guidance,” which was released under outgoing CEO Mike Pearson, who took a lengthy medical leave of absence and returned only recently.
This case also assumes compound annual growth of about 3% for 2016 through 2020. They also assume that Valeant Pharmaceuticals increases its research and development spending, which new management may see as lacking in light of the company’s previous strategy of growing through acquisitions.
What about Valeant’s debt?
As mentioned, the DB team sees the company’s debt as “manageable” in the event of positive revenue growth. They said without any growth, cash flows should still be enough to support those obligations. However, in the case of a 5% decline in compound annual growth, they don’t see enough cash flows to support that debt without cost cuts or debt restructuring.
Although Gilbert and Fraser don’t have a price target on Valeant, they don’t see upside under their base case scenario. The company has spent about $41 billion on acquisitions in the last seven to eight years, and if it recoups those investments, they estimate the company’s valuation at $30 per share.
Will Valeant Pharmaceuticals be sold off piecemeal?
Another possibility they suggest is that Valeant is sold off by the new management in pieces, although they see this as being highly unlikely. They said if the company sells its assets for 10% less than the more than $41 billion it spent on acquisitions, they get a valuation of $18 per share. When looking on a sum-of-the-parts basis based on multiples Valeant Pharmaceuticals paid for some of its assets, which they see as “overly generous,” they get a valuation of $36 per share.
However, they emphasize that they don’t think asset sales will happen or that they are the best option.
Shares of Valeant Pharmaceuticals slumped in morning trades this morning, falling by as much as 1.81% to $27.59.