Mizuho Securities Upgrades Valeant Pharma (VRX) to Neutral on SOTP Valuation
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Mizuho upgrades Valeant Pharma (NYSE: VRX) from Underperform to Neutral and moves its price target from $11 up to $25.
Analyst Irina R. Koffler commented today:
- VRX outfoxes the shorts via financial engineering, in spite of a 2Q:16 miss: Valeant reported rev of $2.4B and $1.40 EPS vs. consensus estimates $2.47B and $1.47 and our estimates $2.51B and $1.54. Management reiterated its FY:16 guidance of $9.9-$10.1B in revenue and EPS range of $6.60-$7.00, which we still view as unrealistic given the 2.2% sequential revenue decline in its top 30 products, 3.4% Q/Q decline in U.S. revenue, and significant pressure to cut SG&A spend. However, the stock soared because management announced plans to divest assets and indicated it would amend its debt covenants to avoid default triggers if EBITDA slips below the lower end of guidance. Because there is now a lower likelihood of stock collapse from another guidance miss, we think our short thesis has been debunked and are upgrading VRX to Neutral with a $25 PT based entirely on an optimistic SOTP analysis.
- Thinking through the SOTP: Management discussed potentially divesting $2B of revenue in non-core assets for $8B, at 11x EBITDA multiples, which we view as highly aspirational. Still, we follow management's margin and multiple estimates applied to key segment revenue ($5B for B&L/International, $3B for Branded Rx, and $2B for U.S. Diversified Products) to arrive at what we view as a highly inflated value of $56/share (which assumes every asset is sold at an 11x EBITA multiple, and all debt and legal expense are repaid). This is the absolute most this business could be worth. Realistically we think many assets cannot attract buyers and we exclude selling the rapidly declining "Neuro/Other" segments and "Other" and Addyi to arrive at a more conservative $25/share, which supports our Neutral rating. Even this may be an optimistic valuation for the business but the important point to make is that the value of the equity is non-zero, and this represents another reason we find it challenging to recommend shorting the stock
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