SEC Investigation Extends Valeant Pharma's (VRX) Road to Confidence - BMO

BMO Capital analyst, Alex Arfaei, takes a stab at valuing Valeant (NYSE: VRX) while acknowledging the limited visibility into the financial impact of the investigation. No change to Market Perform rating.

The SEC investigation and the form 10-K filing delay increase concerns about the integrity of Valeant’s financial reporting. It is very difficult to predict the potential range of outcomes of this SEC investigation particularly given that they do not know its scope. Given the timing of the subpoena, they suspect that this is likely a financial disclosure case related to Valeant’s relationship with Philidor and perhaps other specialty pharmacies. In this scenario, given that Philidor represented only about 1% of Valeant sales in 2014, but grew to about 7% of total revenue in 3Q15 (including other specialty pharmacies), and that based on their estimates it accounted for at most 13-19% of earnings in recent quarters, they do not expect that a potential financial penalty would be indigestible for Valeant.

Based on his analysis of the underlying fundamentals, Valeant’s existing cash and cash generated from operations should be sufficient to cover its debt maturities as they become due.

It is difficult to handicap the potential financial liability of this and other investigations, but the analyst estimates a range of $500MM to $1.25Bn. Using a DCF sensitivity analysis based on the terminal growth rate ranging from -1% to -4% and potential legal liabilities ranging from $500MM to $1.25bn, he derives a valuation range of $114 to $144 per share.

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 $65.80 yesterday.

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