Deutsche Bank 'Remains Cautious' on Valeant (VRX); Analyst Maintains Hold Rating
Deutsche Bank maintained a Hold rating on Valeant Pharmaceuticals (NYSE: VRX) with a price target of $204. Analyst Gregg Gilbert said he remains cautious on the stock given uncertainties related to the drug pricing, its specialty pharmacy distribution model, and related government inquiries.
Gilbert explained, "VRX shares have been under significant pressure, most recently following allegations related to its specialty pharmacy distribution model. While it is difficult to predict how more conservative pricing behavior and other potential changes could affect revenue growth, we thought it would be helpful to look at the sensitivity of our model to a lower growth scenario (see below). While we acknowledge that our current target implies significant upside if the company executes, we remain cautious on the stock given uncertainties related to the US drug pricing environment, VRX’s specialty pharmacy distribution model, and related government inquiries."
The analyst continued, "In addition, we have long been cautious about the risks associated with what had been a high-speed roll-up strategy. The bull case in the past had been tied in large part to the thematic appeal of the story and some investors’ strong desire to invest with CEO Mike Pearson. We suspect that new investors will focus not only on valuation but will want to take a very detailed approach in understanding the company on a bottoms-up basis, which could take some time. It will be important to see how the company and management team deal with a period of adversity after a long period of significant success."
Discussing DCF impact in a lower growth scenario, the analyst said. "To assess the sensitivity of our DCF model to lower revenue growth, we looked at a scenario with no growth for VRX’s legacy (non-Salix) segments (vs. our current mid to high single-digit growth assumptions). For this scenario, we did not change our Salix estimates, which reflect strong growth through 2020 driven by Xifaxan uptake for IBS. This scenario yields an overall revenue CAGR of 4% through 2020 vs. 7% in our current model. In our view, this represents a relatively pessimistic growth scenario for VRX. With no changes to our expense estimates, this scenario yields an implied 1-year DCF value of ~$150/share (vs. $204/share for our current model)."
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Shares of Valeant Pharmaceuticals closed at $118.61 yesterday.