Valeant Drug-Price Travails Put Stock at $72 to Damodaran

  • NYU professor says rout leaves shares near fair-value estimate
  • Citron's comparison to Enron is off base, blog posting says

Shares of Valeant Pharmaceuticals International Inc. are approaching fair value after plummeting as much as 72 percent in the past three months, according to Aswath Damodaran, a finance professor at New York University.

Damodaran, the author of four books on company valuation, estimated in a blog posting Wednesday that Valeant is worth $72.10 a share. That’s 8.6 percent lower than its latest closing price, as shown in the chart below. Valeant fell as low as $73.32 last week after peaking at $263.81 on Aug. 6.

“Given my perspective on the company, and it is undoubtedly flawed, I don’t see Valeant as a significantly undervalued stock,” Damodaran wrote on his Musings on Markets blog. “I also don’t see it as a bubble waiting to burst, a stock heading towards being worth nothing.”

Damodaran assumed operating income will decline 10 percent initially as the company, based in Laval, Quebec, and run from Bridgewater, New Jersey, rolls back drug-price increases. From there, he projected an earnings growth rate of 3 percent annually for the next 10 years, down from 20 percent for the previous five years.

Wall Street analysts are much more optimistic about Valeant’s outlook, according to data compiled by Bloomberg. The average estimate for next year’s adjusted profit is $15.21 a share, up 32 percent from the projection for this year. The stock trades at 6.9 times the projected earnings, well below the comparable ratio of 15.6 for the Standard & Poor’s 500 Health Care Index.

The $72.10-a-share figure exceeds the $50 price that Citron Research put on Valeant three weeks ago, when the short-selling firm published a report that criticized the company’s ties to a mail-order pharmacy, Philidor Rx Services. Valeant severed its relationship with Philidor and said Tuesday that the break would hurt its dermatology business, generating about 20 percent of revenue.

Valeant’s operating income would have to decline 15 percent and earnings growth would have to slow to 1 percent for Citron’s estimate to be on target, according to Damodaran. His posting had alternative valuations of $37.40 to $109.99 a share, based on different assumptions for the two indicators.

Valeant dropped 5.7 percent Wednesday to $78.90.

Damodaran disputed Citron’s comparison of Valeant to Enron Corp., which filed for bankruptcy in 2001 after an accounting scandal. Valeant’s links to Philidor, he wrote, “seem designed more for pricing power than accounting sleight of hand, and it owns assets that have real value.”

Renee Soto, an outside spokeswoman for Valeant with Sard Verbinnen & Co., declined to comment.

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