National Post

NEXT STOP $24 OR $200? VALEANT ANALYSTS EVEN MORE DIVIDED.

Analysts left to read tea leaves on Valeant

- Jonathan Ratner

As the dust settled from Tuesday’s devastatin­g 50 per cent sell- off in Valeant Pharmaceut­icals Internatio­nal Inc., analysts scrambled to reassess the prospects for the company’s shares going forward. And if they were divided before, they are even more so now.

On the l ow end, CIBC World Markets set a new price target of US$24 for the shares traded in New York, the lowest on the Street, down from US$90 previously.

At the other end of the spectrum, BMO Capital Markets left its outlook for the stock unchanged at US$ 133. ( That’s still well below Evercore ISI at US$200, which also reiterated its target price.)

The dramatic share price movement demonstrat­es how both investors and analysts were caught off guard by the magnitude of Valeant’s guidance reduction.

While certain parts of the earnings and guidance shortfall are understand­able given the company’s ongoing changes and challenges, Valeant’s reschedule­d conference call left the investment community with more questions than answers.

Despite several messy quarters still ahead for Valeant, most analysts at the high end of the spectrum stuck with their bullish stance — a somewhat puzzling developmen­t after more than US$ 10 billion in shareholde­r value was erased in just one day. Meanwhile, many of those who were already negative on the stock, cut their targets further.

These lowered expectatio­ns were also a result of the sharp decline in Valeant’s cash position, a sales dip for almost all of its top- selling products, and the failure to provide any more informatio­n about the timing of its pending 10- K filing.

“Management’ s credibilit­y continues to be poor, and ( Tuesday’s) call did nothing to improve that,” CIBC World Markets analyst Prakash Gowd told clients, downgradin­g the stock to sector underperfo­rmer f rom sector performer. “We believe even longtime supporters may have lost confidence in management’s ability to see the business through this turmoil.”

He believes a management change is likely at Valeant, although finding a replacemen­t chief executive probably won’t be easy.

But Michael Pearson may not be the only one on the way out the door. Since Valeant recently paid out its annual bonuses to employees, the company may see more resignatio­ns as individual­s look for more stable working environmen­ts.

Pearson has done little to assuage spooked investors, and Tuesday’s conference call was a perfect example.

After Valeant revealed that it was cutting its 2016 EBITDA guidance for the next four quarters, a caller noticed that the number in the company’s slide presentati­on was lower than the figure on its press release.

Gimme Credit analyst Vicki Bryan noted t hat Pearson deflected the question “meandering­ly” and said management a nd Valeant’s board continue to debate guidance. He was quickly interrupte­d by another executive, who said the numbers of the press release were incorrect and would be adjusted.

Bryan interprete­d this mishap as a sign of how little confidence there may be in Valeant’s earnings outlook behind the scenes.

“With so many questions still unanswered, and so little convincing informatio­n available, we remain skeptical of Valeant’s guidance for 2016,” she said in a report.

It’s difficult to see what a revamped Valeant can do to restore its credibilit­y business partners, regulators, shareholde­rs or bondholder­s anytime i n the nearterm. Costs are also rising sharply, as Valeant is forced to defend i t self amid a range of government probes and lawsuits, and it faces a US$ 30 billion debt burden that comes with hefty interest payments.

Cutting his price t arget on Valeant to US$ 69 from US$ 85, RBC Capital Markets analyst Douglas Miehm t hinks i nvestors will remain focused on the possibilit­y of default until amendments have been announced.

Valeant’s weak guidance was probably the last straw for many investors, and the threat of default on Valeant’s debt raises further questions about what is behind the delayed 10- K filing.

However, the company’s assets still have some convinced that it is worth substantia­lly more than the current share price reflects.

Alex Arfaei at BMO acknowledg­ed that Valeant’s earnings and guidance will do little to boost investor confidence, but he maintained a US$ 133 price target on the stock.

“The quarter was worse than we expected, the guidance was worse than we expected, and the timing of the 10- K is still uncertain,” he said in a report before Valeant’s conference call.

On a rare positive note, Arfaei pointed out that the neurology and other/gen- eric products segment — home to some of the products that saw controvers­ial price hikes — came in approximat­ely 23 per cent higher than anticipate­d.

Analysts seem to agree that Valeant chose to use cautious language in its press release, perhaps to lower the market’ s expectatio­ns. But it is unclear whether the company is being intentiona­lly conservati­ve to generate positive momentum for the stock in subsequent quarters, or if there is risk to the current numbers.

The recent past has shown that Valeant’s outlook can change meaningful­ly in a short period of time.

 ?? RICHARD DREW / THE ASSOCIATED PRESS ?? Valeant said it could default on some of its debt if it does not complete financial statements by late April.
RICHARD DREW / THE ASSOCIATED PRESS Valeant said it could default on some of its debt if it does not complete financial statements by late April.
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