Valeant Falls 9.7% as Analyst Says Sell, Questions Strategy

  • Wells Fargo cites accounting `opaqueness,' debt levels
  • Maris sets target price as much as 24% below Friday close

Valeant Pharmaceuticals International Inc. fell 9.7 percent after a Wells Fargo analyst initiated coverage of the stock with an underperform rating, citing “unanswered questions” about the drugmaker’s accounting methods and strategic direction.

“The Valeant board and management have made decisions that may have put Valeant at significant business and reputational risk,” David Maris said Friday in a research note. “While it is often noted that Valeant’s management team has created a huge amount of value, our perspective is different: Valeant has lost approximately $60 billion of market value from its peak, yet its current market value is approximately $30 billion.”

The shares dropped $9.12 to $84.99 at the New York close on Friday, the largest decline since Dec 28. Maris gave a target price of $65 to $68 for the shares, the low end of which is almost 24 percent lower than Valeant’s closing price.

A Valeant spokeswoman wasn’t available to comment.

Valeant is expected to release fourth-quarter earnings soon, though hasn’t announced a date. The shares have plummeted since their $262.52 August peak on concerns about the company’s now-severed ties to the mail-order pharmacy Philidor Rx Services, high levels of debt used to make acquisitions, and most recently the status of Chief Executive Officer Mike Pearson, who is on medical leave.

“Our concerns stem from a number of factors, including opaqueness related to accounting issues, what we see as balance sheet risks,” and how the company has responded to Philidor and other matters, Maris said.

‘Considerable Subjectivity’

Among the concerns raised by Maris is the fact that receivables growth has outstripped sales growth over the past several years. And Valeant has used a type of tax accounting that allows a company to defer a portion of its tax obligations to future periods, Maris said. Valeant, which had about $1.8 billion of total deferred tax assets as of Sept. 30, is using “considerable subjectivity in setting up deferred tax asset accounts,” the analyst said.

Maris also said shareholders should be wary of Valeant’s use of so-called cash per-share earnings.

“This metric seems somewhat arbitrary,” he wrote. For a company like Valeant, whose business model is based on acquisitions, deal-related expenses shouldn’t be stripped out from adjusted earnings because they’re critical in assessing management’s success in that strategy, Maris said.

Maris also pointed to the company’s more than $30 billion in debt outstanding and $1.6 billion of estimated interest expense for 2016.

Valeant currently has 16 buy ratings, eight holds and two sells, according to data compiled by Bloomberg, with target prices on the stock of $88 to $213.

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