An analyst at Japanese investment bank Mizuho has outlined a ‘liquidation scenario’ for Valeant Pharmaceuticals.
Essentially, this is Mizuho’s approximation of what would happen to the company’s stock if its management were “ousted” and it had to sell all of its assets in a fire sale.
The verdict: It would end up trading about 20% higher than it is now ($US78), and settle at $US100 a share.
“We try to remain rational and reiterate our BUY rating: We understand the panic associated with the turnover of large shareholders, potential government investigations, and the threat of management replacement,” wrote analyst Irina Koffler.
“Despite our catastrophic analysis, our current price target remains $US155 and we are not changing our estimates ahead of updated management guidance.”
Valeant’s stock has dropped around 20% in two days, after Sens. Claire McCaskill (D-Missouri) and Susan Collins (R-Maine) are launching a bipartisan investigation into Valeant — and other pharmaceutical firms — for price gouging.
“Some of the recent actions we’ve seen in the pharmaceutical industry — with corporate acquisitions followed by dramatic increases in the prices of pre-existing drugs — have looked like little more than price gouging,” McCaskill said.
Comments from the company’s third largest shareholder, investor Bill Ackman, reported in the Wall Street Journal didn’t help matters either. He said that Valeant’s CEO Michael Pearson needed to be more transparent through the company’s turmoil.
“If Mike hides in his bunker on this, he can’t be CEO,” Ackman told the company’s lead director, Robert Ingram of Hatteras Venture Partners, the Journal reported.
Later in the day Ackman sent an email to Pearson reiterating his support for the CEO.
Valeant, once a Wall Street darling, has seen its stock price fall by half over the last few months as politicians have attacked its low R&D spending business model and accused the company of price gouging. This is a business model that short-sellers have questioned for years, saying that Valeant is an accounting rollup that lacks real organic growth.
Meanwhile, as it was defending its business model, Valeant was also forced to answer questions about its close relationship with a shady specialty pharmacy called Philidor — a pharmacy that it had not disclosed to its investors until last month.
Blame the politicians, the press
In its report, Mizuho cites short-sellers, legislators, and the media as risks to Valeant’s stock price, though it believes stories about Senator McCaskill’s investigation should be “less impactful going forward.”
Other risks include the “new criminal investigation into B&L payments to doctors using its surgical products that was disclosed in the 3Q:15 10-Q filing.”
Valeant faces potential tax increases as well as weakness in key markets like Russia.
What’s more interesting — and potentially riskier than any of that — though, is that Mizuho cites two huge parts of Valeant’s model as a risk:
- “Valeant’s business transformation to a company that is less dependent on pricing could take time,” it said, and,
- “The company may fail to identify attractive acquisition targets and recent new deals…may under-perform expectations.”
Koffler also cites Valeant’s management as a risk — “Senior management turnover still represents a risk at this time, even though Mike Pearson has the full support of the Board of Directors,” she writes.
But again, if everything goes wrong, Valeant can sell everything it owns and be worth $US100:
After calculating the value of the individual segments, we added in Valeant’s current cash position, inventory value (assuming no impairment), accounts receivable (assuming none are uncollectible), and PP&E. We then subtracted Valeant’s debt obligations, accounts payable, and accrued liabilities to find the cash available to shareholders. Dividing that by number of shares yielded $US100.38.
One thing about fire sales, though is that they are sales. The buyer rarely pays full price.
That’s what makes them so hot.
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