Here’s Why Analyst David Maris Is a Party Pooper on Valeant Pharmaceuticals Intl Inc (VRX) After 3Q Turnout

Though investor sentiment has turned positive on VRX after 3Q earnings, Wells Fargo makes a bearish case.

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares have risen almost 28% since the biotech giant posted third quarter earnings last Tuesday, racking up a total 39% skyrocket in value with sentiment already racking up 39% in value from the 2nd. In other words, even before the print, sentiment has been on a rise for this comeback kid of the Street.

However, one long-time bear is not joining the earnings party, finding that even if he acknowledges “some progress that should not overlooked – like getting Siliq and Vyzulta approved,” Wells Fargo analyst David Maris does not see the third quarter outcome as any reason to switch over from the bearish camp.

“Overall, we do not think 3Q was strong for Valeant, and we believe the positive market reaction is unwarranted,” writes the analyst, maintaining an Underperform rating on VRX stock without suggesting a price target. (To watch Maris’ track record, click here)

For those that deem Dermatology a “fixed” challenge or believe the giant has a slew of new products ahead that can yield stellar launches, the analyst points to litigation and investigation risk outweighing the reward. Keep in mind, Maris warns, this is a company who continues to face swirling forthcoming suits and unfolding investigations.

In the third quarter, Valeant witnessed a 10% dip year-over-year in sales with R&D spending at -20% year-over-year, which leads Maris to question how a giant where 4% of revenue spills over to R&D and falls 20% under the year before can “have enough winners to offset the normal LOEs.” Especially, the analyst continues, with dermatology sales waning 34% year-over-year. To Maris, Valeant’s trumpeting of paying debt down early when considering its own expectations just seems very smoke-and-mirrors when he finds leverage looks steeper present-day than this time last year or even last quarter.

Maris underscores, “On margins for 2018, Valeant indicated that while it will not provide guidance for 2018, the LOEs are very high margin and based on that one can directionally see the impact. We took that to mean margins are likely to further decline in 2018. On taxes, Valeant indicated that the proposed tax reform plan outlook is far from clear, but noted if passed as written it could potentially have a significant impact on Valeant. Valeant indicated that it is very pleased with its flexible tax position, and would hope to mitigate some tax increases with potential tax mitigating moves, but did not provide any details as what these might be.”

Ultimately, the analyst closes his research not giving warning to investors who may have gotten too bullish too soon on this troubled biotech giant: “We believe that Valeant will likely face higher taxes in the future than in the past.”

Wall Street is quite divided between the bulls sending the stock rising recently with hope for recovery and bears just like Maris who find far more to be concerned about the future, with TipRanks analytics exhibiting VRX as a Hold. Based on 14 analysts polled by TipRanks in the last 3 months, 4 rate a Buy on Valeant stock, 7 maintain a Hold, while 3 issue a Sell on the stock. The 12-month average price target stands at $19.18, marking a nearly 25% upside from where the stock is currently trading.

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