Valeant (VRX) Management Meeting Reinforces Confidence - Morgan Stanley

August 25, 2016 10:09 AM EDT
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Morgan Stanley analyst David Risinger reiterated his Overweight rating and $42 price target on Valeant Pharmaceuticals (NYSE: VRX) after visiting the company's HQ in New Jersey and meeting with CEO Joe Papa, SVP of Strategy and Communications Scott Hirsch, and Treasurer Linda LaGorga. They continue to be confident that management is taking the right
steps to turn the business around and pay down.

Risinger noted that while consensus is skeptical about the 2H ramp, management highlighted revenue and cost factors that should help drive improvement.

He highlighted: "On revenues, mgmt. cited some growth levers: 1) Improving derm revenues due to new Walgreens and prior authorization programs starting in early August, 2) Relistor Oral launch likely in September, and 3) back half seasonality. Mgmt. acknowledged that Xifaxan remains a work in progress due to sales force turnover and competitive pressure from Allergan's Viberzi. On cost cuts, the overall message was that VRX's decentralized infrastructure was built for an M&A machine predicated on speed. VRX is no longer the same company, however, and new mgmt sees opportunities to eliminate local redundancies. COGS improvements are already underway with initiatives such as procurement centralization. R&D is set to decrease in 2H;16 after "overspending" in 1H:16, including on brodalumab. On SG&A, mgmt. stated that it intends to centralize more costs and that it simply won't spend on businesses that can't generate sufficient ROI, We and consensus model 2016 results slightly below the bottom end of mgmt guidance."

Other notable tidbits:

1) Papa had been in discussions with new CFO Paul Herendeen for a few months to bring him on board. Papa did not commit and say that Herendeen has "bought in" to 2H16 guidance, but commented that Herendeen had spent a lot of time trying to understand the business before taking the role.

2) The company has approximately $2B of NOLs in the U.S. and $2B in Canada, which help offset tax leakage in asset sales.

3) Mgmt. believes investigation-related settlements are two years away at minimum. Once fines/settlements are "estimable and probable" then the company will reserve cash for settlements in restricted cash (as per accounting rules).

4) Upcoming contingent consideration payments include ~$150M for brodalumab approval and $50M for Relistor oral. We already factor in $400M of contingent consideration in 2H:16 in our cash flow model.

On divestitures, management expects the processes to take approximately six months from
June. This implies potentially meaningful announcements by the end of the year.

For an analyst ratings summary and ratings history on Valeant Pharmaceuticals click here. For more ratings news on Valeant Pharmaceuticals click here.

Shares of Valeant Pharmaceuticals closed at $30.54 yesterday.

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