Valeant Pharmaceuticals Intl Inc (VRX) stock is down by 20% in the last one month. The company is facing several challenges.
Shares of Canada based specialty pharma company Valeant Pharmaceuticals Intl Inc (NYSE:VRX) remain highly volatile as bulls and bears continue to play their tug of war. Valeant stock tanked around 7% during yesterday's trade. While this is a big drop, a more than 5% movement in Valeant stock in a single day is not an infrequent occurrence. A look at Valeant stock chart for the year-to-day period will give you some idea. After rallying more than 15% by February, Valeant stock tanked by 50% towards April end, only to rally by over 100% from there before the recent correction began towards July end. The stock is currently down 8% after yesterday's crash.
Valeant stock tanked almost 7% yesterday after an analyst warned of multiple weaknesses in the company's story. Mizuho's analyst Irina Koffler slashed her price target on Valeant stock from $8 to $7 based on the sum of the parts valuation. The new price target indicates a massive 48% downside from yesterday's close. The drop in Diversified revenue is a cause for concern. She expects Valeant to miss its 2017 revenue and EBITDA guidance and is not confident of the company achieving 2018 expectations as well. To quote her:
"Our valuation relies in part on SOTP analysis and we note that EBITA margins in the Diversified segment dropped from ~81% in 2016 to 73% YTD. This business remains very critical to Valeant and in 2Q:17 Diversified revenue declined 27.3% Y/Y (representing 16% of top line but 30% of EBITA). This segment should fare even worse in 2H:17.... We expect Valeant to miss its 2017 revenue and EBITDA guidance, and FactSet consensus 2018 estimates still appear too high."
While the analyst note was the immediate trigger for the decline, it is important to note that Valeant stock has been in a downtrend in the last one month.
Legal woes continue to dog Valeant stock.
While the company had announced during the recent earnings, that it has closed two major law suits, relating to Philander and Siliq, the mistakes of the past continue to haunt Valeant Pharma. Investment management firm Lord Abbett recently filed a fraud lawsuit against Valeant, claiming a massive $80 billion in damages! For perspective, last year, Valeant reported around $8.67 billion in revenues and the company's current market capitalization is around $4.6 billion.
Lord Abbett & Co. is alleging that it bought VRX’s debt securities at an artificially inflated price based on misleading information provided by Valeant. The suit alleges violations of New Jersey’s racketeer influenced and corrupt organizations (RICO) law. By invoking the RICO law in New Jersey, the location of Valeant’s U.S. headquarters, Lord Abbett could seek a penalty three times as large as the losses it allegedly sustained from the decline in Valeant’s share price. In a filing with the SEC, the company has said that the class action suits are without merit and that it intends to fight them. At the very least, this law suit could result in a large legal cost for Valeant and cause further damage to the brand. Valeant has set aside just $162 million to handle its legal troubles, which is obviously not enough to meet the legal expenses and the potential legal payments.
Making progress on the debt payment, but still a long way to go.
Apart from regulatory risk, Valeant also faces insolvency risks due to its massive debt burden. While the company has made progress on this front, it is likely to achieve its target of reducing debt by $5 billion much ahead of its March 2018 deadline, it still has a long way to go. Valeant still has over $27 billion in debt on its book. The company has a leverage of more than seven times and its EBITDA is declining. Valeant carries a massive risk.
In yesterday's trade, Valeant stock breached its 100-day and 200-day moving average lines on higher than usual volumes, which is a bearish signal. As you can see 100-day moving average had provided support to Valeant stock earlier. Valeant stock is likely to face resistance from the 100-day moving average from now.
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