Piper Jaffray Downgrades Valeant, Says Management Doesn't Have Handle On The Health Of Its Own Business

Piper Jaffray have downgraded the shares of Valeant Pharmaceuticals Intl Inc VRX to Underweight from Neutral, given the persistent uncertainty over the trajectory of a number of key segments, along with the reality of high debt levels and specifically myriad debt covenants.

"The ever-shifting commentary from VRX surrounding a number of segments in our view suggests that management simply does not have a handle on the health of its own business," analyst David Amsellem wrote in a note to clients on Tuesday.

The brokerage, whose price target on Valeant continues to be suspended given the absence of audited financials, said it is concerned over number of comments from management.

Valeant noted that its new guidance reflects a slower rebound of its dermatology business, a markedly different tone compared to the relatively sanguine comments from Valeant last December in the wake of the signing of the agreement with Walgreens Boots Alliance Inc WBA.

The company is now citing underperformance in other business units that it had not called out previously, such as its Western European segment and certain aesthetic units in the U.S. (namely Obagi and Solta).

Related Link: Valeant Breaches $40

Amsellem said the commentary surrounding the gastroenterology business is a head scratcher. Valeant also cited weakness for what had been a top-performing segment, noting that a number of orders for these products were canceled due to a negative initial reaction by other customers (distributors and retailers) to the Walgreen's program (even though GI products are not part of the program).

"Given that prescription (Rx) volumes for top-seller Xifaxan continue to grow (sequential Rx growth of 11% in 4Q15 versus 3Q15, per IMS), we wonder if high inventory levels are still problematic," the brokerage said in a research note.

Valuation Analysis

On the valuation front, the brokerage noted that it is hard to say the shares are cheap when debt levels are exceedingly high and there is no visibility on organic growth.

"Given the myriad weaknesses for the business, debt/EBITDA of 5.8x at the end of 2015 (meaning an inability to do strategic M&A and an inability to repurchase shares for the foreseeable future), along with a delay in the reporting of audited financials (and a potential breach of financial reporting covenants), it is hard to argue that VRX shares are a bargain at a P/E of 5x the top end of the 2016 EPS guidance range," Amsellem added.

Shares of Valeant have plummeted 82 percent from its 52-week high $263.81 high last August when Valeant's practice of buying rights to old drugs and boosting the prices came under congressional scrutiny. They were currently down 44 percent at $38.66.