UPDATE: Morgan Stanley Sees Valeant (VRX) as 'Real Company' But Maintains Equalweight Given Risks

(Updated - November 17, 2015 11:15 AM EST)

Morgan Stanley maintained an Equalweight rating on Valeant Pharmaceuticals (NYSE: VRX) and lowered its price target to $98.00 (from $200.00). Analyst David Risinger sees the stock as cheap and said risk is skewed to the upside, but he maintained his Equalweight rating due to lack of clarity on its investigation. Estimates were lowered to account for the negative impact of Philidor and U.S. growth uncertainty.

"Our view is that Valeant, despite Philidor and other controversies, is a real company selling real drugs to real patients. Our new base case price target is $98 (7x 2017E EBITDA; see valuation section); note we cannot ignore, nor can we quantify the “cost” of Philidor and investigation risks. Despite peer low valuation, we are Equal Weight VRX shares pending greater clarity," said Risinger.

The analyst continued, "We expect pressure on Valeant's US branded Rx business (~40% of global sales) due to the company's transition away from a key growth driver—its Philidor specialty pharmacy— plus more modest price benefits. Recall Philidor represented ~6% of YTD sales, but est. over 50% of US organic growth YTD, by our estimates. We lowered 2016E rev -8% from $13.6B to $12.6B and EPS -11% from $16.22 to $14.42. We also lowered 2017E rev -8% from $14.8B to $13.6B and EPS -12% from $18.77 to $16.47."

Risinger added, "While we have valued VRX on '17 earnings, investors are focused on 2016 given the previous $7.5B+ EBITDA floor. Assuming a 2016 EV/EBITDA multiple of 8x (two turns below spec pharma median), Valeant's share price implies that the market expects ~$6.4B of EBITDA in '16E or $1.1B below mgmt's previous guidance of $7.5B+. At approximately $51B enterprise value and using a range of 7-9x, the implied EBITDA of the company ranges somewhere between $5.7B-$7.3B (Exhibit 8). But note that investigation/accounting risks create a discount in VRX valuation."

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 $73.32 yesterday.

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