BMO 'Incrementally Positive' on Valeant (VRX) Following Conf. Call; Still See N-T Headline Risk Affecting Shares
BMO Capital is out with commentary on Valeant Pharma (NYSE: VRX) following today's conference call.
Analyst Alex Arfaei said the firm is incrementally positive on Valeant following the event. The analyst believes management provided good commentary about their near-term plans, and status of business operations. The focus now is on the remaining headline risk and execution in 2016.
Arfai sees near-term headline risk on Valeant as medium-to-high until the conclusion of the committee's investigation, at the earliest. The analyst commented, Valeant’s business is under high scrutiny, and we believe many investors are concerned that there may be other not fully disclosed potentially aggressive and questionable business practices that could make the stock vulnerable again. Management stated that the company doesn't have other arrangements like Philidor, whose operations were basically not under complete Valeant control, whereas everything else is under Valeant’s control. While as with any other large, multi-national organization, there is always some operational risk, we believe that if Philidor’s structure is in fact an exception to Valeant’s operations, then Valeant should be able regain investor confidence with execution and more judicious business practices.
Clearly, the outcome of the ongoing ad hoc committee investigation, led by former Deputy Attorney General of the United States Mark Filip, should help investors make this determination. Unfortunately, Valeant did not provide an update on the expected conclusion of the ad hoc committee’s investigation; however, we estimate that it will likely be concluded by the end of 1Q16.
Arfai also noted, In the near term, we believe there will clearly be some disruption in Valeant’s dermatology business. We conservatively estimate that starting in 4Q15 and onwards, Valeant will lose ~80% of its specialty pharmacy business, or roughly one third of the U.S. dermatology business. Valeant stated that it will be contracting with other specialty pharmacies to regain this business by ~2Q16; however, our forecasts conservatively assume ongoing impact throughout 2016 and 2017. Importantly, we note that our conservative assumptions are mostly in line with consensus, which does not seem to have fully accounted for the lowered specialty pharma business.
BMO rates Valeant at Market Perform with a price target of $133.
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