Cantor’s First Take: Bullish on Valeant Pharmaceuticals Intl Inc (VRX), Sidelined on Endo International (ENDP)

Cantor analyst Louise Chen is out with initiation reports assessing Valeant Pharmaceuticals Intl Inc (NYSE:VRX) with more confidence than the rest of the Street’s sentiment, but less positive on Endo International plc (NASDAQ:ENDP). Valeant may have attracted some negative buzzy news throughout the year, but the analyst ventures this negative press is on its way out, enthusiastic on the biotech giant’s irons in the fire that could bolster shares. The Street is not giving enough credence to the strength of Valeant’s pipeline, wagers Chen. However, Endo presents a different story, one mired in relentless competition in the generics market and earnings prospects that look hazy for next year.

As usual, we recommend taking analyst notes with a grain of salt. According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Louise Chen is ranked #4,497 out of 4,574 analysts. Chen has a 31% success rate and faces a loss of 15.7% in her yearly returns.

Now let’s explore Cantor’s bullish case for Valeant, but why Endo merits a neutral stance at this time:

3 Key Reasons to Buy Valeant Stock

Valeant may have waded some troubled biotech waters of late, but to Louise Chen, there simply is “no such thing as debtor’s prison,” at least not “anymore.” The analyst believes Valeant’s story is one Wall Street is underestimating, with a pipeline of “blockbuster drug opportunities” that could be exactly what this giant needs to ease its debt load.

As such, the analyst initiates coverage on VRX with an Overweight rating and a price target of $18, which implies a just under 49% increase from where the shares last closed.

Chen cheekily opines, “Don’t have to eat that upside down pineapple cake anymore, because the path to a right-side up capital structure is within sight,” or in other words, “We think that Valeant can lower its debt to manageable levels in the medium term, but the Street is still overly concerned about Valeant’s high leverage ratio, in our view. ”

True, the debt towers at a lofty approximate $29 billion price tag, but the analyst has conviction that Valeant could bring that to a range of $15 billion to $20 billion within the upcoming years. If proven correct, this would take VRX’s financial leverage ratio from around 7x back to 4x to 5x, which would in turn alleviate the Street’s apprehension.

Moreover, “If the company can turn its capital structure right-side up, there is meaningful upside to Valeant’s equity value, by our estimates. The core assets have always generated a good amount of cash, especially when we look at the cash flow relative to the revenue streams. Valeant has 40% EBITDA margins and this is meaningfully higher than some of its competitors with better valuations,” argues Chen.

What of those who see the biotech giant as a “Hang Man” game of discouraging news running rampant? Valeant has become a victim of bad pharma industry publicity, but these headlines are no longer flying quite like one year prior, explains Chen, who believes this knocks out a peg from the bears who have steered clear of the stock.

Lastly, with drug prospects including moderate-to-severe plague psoriasis drug Siliq/ Brodalumab, glaucoma drug Vyzulta, topical psoriasis lotion treatment IDP-118, and eye redness reliever candidate Luminesse,” the analyst proposes, “We think the Street could start giving Valeant more credit for its new drugs as investors gain more confidence in the company’s ability to lower its debt level.” Ultimately, Chen is just waiting for the rest of the Street and investors to catch up to his bullish perspective on Valeant’s ability to rebound.

TipRanks analytics indicate VRX as a Hold. Out of 13 analysts polled by TipRanks in the last 3 months, 1 is bullish on Valeant stock, 9 remain sidelined, and 3 are bearish on the stock. With a return potential of 22%, the stock’s consensus target price stands at $14.80.

Endo’s 2018 Earnings Potential Is a Current Question Mark

Endo faces a fierce generics rivalry, one that has Chen approaching the biotech firm from the sidelines until ENDP is more primed to unlock growth catalysts from its two key acquisitions: Par/generics and Auxilium/specialty brands. Therefore, even though the analyst appreciates the firm even boasts “one of the best management teams in the industry,” she initiates coverage on Endo with a Neutral rating and a price target of $12, which represents an 11% increase from where the stock is currently trading.

“Paul Campanelli, Blaise Coleman and Terrance Coughlin have all successfully grown other established generics companies. That said, uncertainty regarding Endo’s earnings potential in 2018 keeps us on the sidelines for now. We would be more positive on Endo’s stock if visibility improves on how Endo could offset sales lost to increasing competition for generics of Seroquel XR and Zetia in 2018.”

2018 circles like a shark in the distance and Chen warns to “mind the gap,” especially considering steep competition that is eyeing the market, ready to hit as soon as ENDP’s exclusivity period wraps up. If the firm is unable to offset sales revenue from Seroquel XR and Zetia by next year, an amount circling $275MM to $28MM, the analyst fears cash flow walks a tight line. Furthermore, “Other headwinds that could curtail cash flow include: 1) additional vaginal mesh cases, 2) inability to divest non-core assets or get the price Endo wants, 3) a generic filer for Vasostict and, 4) the removal of Opana ER from the market,” Chen highlights.

Endo is fourth on the leaderboard in terms of generics companies, and the analyst acknowledges “scale is important,” yet the firm’s brand products have been on year-over-year sales dips. However, Chen wagers ENDP’s Specialty Brands segment is undervalued by the Street, adding cellulite treatment Xiaflex “could be a game changer,” but as Phase 3 trials do not even start until the back half of the year, it is too soon to buy shares with just Xiaflex in mind for now.

The growth drivers primarily stem from two deals, Par/generics and Auxilium/specialty brands. On 9/28/15, Endo completed the acquisition of Par for $8B. On 1/29/15, Endo completed the acquisition of Auxilium for $2.6B. Endo’s EV today is ~$9.8B.

Chen concludes pointing to the Par/generics and Auxilium/specialty brands multi-billion dollar acquisitions, asserting these presently lack “a lot of synergies,” but could bring compelling value to the table should ENDP separate them into brand and generics. “That said, Endo is not ready to do this yet, in our view,” surmises the analyst, who for now is surveying the firm’s prospects from a stance of caution.

TipRanks analytics show ENDP as a Buy. Based on 8 analysts polled by TipRanks in the last 3 months, 2 rate a Buy on Endo stock while 6 maintain a Hold. The 12-month average price target stands at $15.43, marking a nearly 43% upside from where the stock is currently trading.

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