Why Valeant Is Getting Hit By Drug Pricing Concerns: Morgan Stanley

• Valeant Pharmaceuticals Intl Inc VRX shares have been volatile over the last 5 trading days, down 27 percent since September 22.
• Morgan Stanley’s David Risinger maintained an Overweight rating on the company.
• While the company’s shares have plunged on drug pricing concerns, Risinger projected mid-to-high single-digit annual hikes in US prices in 2016 and beyond.

The Democratic members of the Committee on Oversight and Government Reform have requested a subpoena for documents related to Valeant’s price increases of Nitropress and Isuprel. The Democratic members alleged that the company was deploying the strategy of “acquiring life-saving drugs to maximize their own corporate profits."

Analyst David Risinger commented, “Our DC-based consultant believes that a subpoena is unlikely to be issued, and a hearing, if held, would be controlled by the majority (i.e., Republicans).”

While in majority, the Republicans have indicated little interest in this issue. There could be two main outcomes of the latest development, both of which are likely favor Valeant, Risinger said.

1. If the Committee’s Chairman does not hold a formal bipartisan hearing, the minority would not be able to do much, and their actions would receive “little attention and attendance”
2. Even if a hearing is held, the Republicans would decide the theme, number of witnesses, and how many witnesses the minority can invite. “Although some Republicans could scrutinize and criticize Valeant, we do not expect the Republican party to advocate for federal control of drug prices,” Risinger wrote.

In the report Morgan Stanley noted, “Our 2016 and beyond financial projections assume mid-high single digit annual US price increases, consistent with US Major Pharma companies we cover.”

Valeant generates 70 percent of its sales from the US. Risinger projected global revenue and EPS CAGR of 8 percent and 13 percent, respectively, for 2016-2020.