Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares surged on Thursday as investors ignored the warnings issued by analysts from multiple firms. The stock climbed by as much as 5.06% to $25.13 during morning trading.
The drug maker is working fast to restructure its distribution deal with Walgreens, but its high debt level is giving analysts pause. Multiple firms have slashed their price targets following this week’s first quarter earnings call, and Standard and Poor’s has now retreated from its May comments that it might raise the company’s B credit rating.
How much worse can Valeant get?
Wells Fargo Senior Analyst David Maris believes that sometimes investors see a stock fall so low on bad news and buy it because they don’t think things could get any worse. He adds that while sometimes it ends up being the right call, it’s always possible for things to get worse, and he believes that this is the case with Valeant. As a result, he cut his estimates and valuation range for the company to a range of $17 to $22 per share from his previous range of $25 to $30.
He remains skeptical about the deal with Walgreens, noting that management finally revealed that the company has been losing money on drugs sold through the mail-order program. He adds that Valeant Pharmaceuticals revealed new investigations it hadn’t disclosed before in its delayed 10-Q filing. The almost nine-page Legal Proceedings section of the filing reveals a new probe by the California Department of Insurance and a class action lawsuit filed by a pair of employee benefit funds in New Jersey District Court under the federal Racketeer Influenced Corrupt Organizations Act, known as RICO.
The suit accuses Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and its previous mail-order pharmacy Philidor of mail and wire fraud. Maris warns investors that Valeant may end up being liable for “significant monetary damages related to investigations and law suits.” He’s currently estimating $2 billion in legal settlements and expressed surprise that the drug maker hasn’t begun preparing for the legal storm. Further, while the company wants investors focused on its product pipeline, he doesn’t see anything special there and, in fact, sees trouble ahead for its lead product, a psoriasis drug that studies have suggested “causes suicide ideation,” he added.
Valeant’s vital signs weakening
Susquehanna Financial analyst Andrew Finkelstein slashed his price target from $35 to $25 per share and seemed surprised that the company’s stock only fell 15%. He said investors may view the guidance cut as management simply setting the bar low and thus may see it as an attractive risk/ reward. However, he said the “reduced breathing room” on the company’s debt covenants undermines this. He added that while the default risk isn’t “imminent,” it is back on the table after he thought Valeant had fixed the problem earlier this year.
Rodman & Renshaw analyst Raghuram Sekvaraju also slashed his price target, lowering it from $102 to a still-bullish $90 per share. He may be one of the few analysts who still has a Buy rating on the drug maker. However, even he is starting to see the value leech away and suggests that it might only be able to be realized through asset sales. This marks a significant shift from his past expectations.