Valeant Pharmaceuticals Intl Inc (VRX) Has A New Bear In Town


Have Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares just gotten too expensive? Shares are tumbling 10% after a cautious analyst decided it is no longer wise to play it safe, deciding to step away from the sidelines on VRX. The reason? The struggling biotech giant’s estimates for the next two years seem too ambitious. Moreover, now after shares have rallied close to 100% from the stock price before the third quarter print, Valeant’s valuation simply does not make a “compelling” argument to invest.

While “fundamentals improved” in the giant’s picture, valuations are “stretched,” and J.P. Morgan analyst Chris Schott is not here for this investment opportunity anymore.

As such, the analyst downgrades VRX stock from Neutral to an Underweight rating, while raising the price target from $10 to $12, which implies a 42% downside from current levels. (To watch Schott’s track record, click here)

More on Smarter Analyst: Joel Greenblatt’s Magic Formula Says No to Pharma Giant Valeant Pharmaceuticals

Schott believes, “While Valeant has made progress stabilizing its core operations and addressing near-term debt maturities, the company still faces significant patent erosion over time that will result in a step down in 2018 EBITDA (JPMe: $3.1bn) and muted recovery off of these levels. Further leverage remains challenging at ~7x currently vs an ideal intermediate range of 4-5x. With VRX now trading at a premium to the Specialty Pharma group (~10.5x 2018E EBITDA vs ~9.5x group avg.) and only a modest discount to the Major Pharma group (~12.5x average with VRX roughly in line with PFE, MRK and AGN), we see better opportunities elsewhere in the space.”

Additionally, the analyst’s sum of the parts analysis suggests “a less favorable risk/reward” for Valeant. “On a peer comparison basis, Valeant trades at a premium to specialty peers (~10.5x vs ~9.5x 2018E EBITDA for peers) despite facing a fairly challenging fundamental setup (like many of its peers),” Schott concludes, noting that the “core franchise recovery remains a work in progress,” with the “bright spot” of Bausch & Lomb/International no longer being enough to sway the analyst’s optimism.

TipRanks demonstrates that only one bull is willing to bet on Valeant these days, with a largely pessimistic analyst consensus confronting the recovering biotech giant. Out of 11 analysts polled in the last 3 months, the Street is split between the cautious and the straight-up bearish, with 6 analysts rating a Hold on VRX stock and 4 issuing a Sell. The 12-month average price target stands at $16.00, marking a 22% downside from where the stock is currently trading.  

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