Valeant Pharma has only modest upside, says Canaccord Genuity

Valeant Pharmaceuticals International’s (TSX:VRX, NYSE:VRX) fourth quarter may have met with expectations, but the news going forward is still not rosy enough to make the stock attractive, says analyst Neil Maruoka of Canaccord Genuity, who maintains his “Hold” rating and drops his one-year target price to $17.50 (all figures in USD).

On Wednesday, Valeant announced its fourth-quarter and full-year 2017 results and introduced its 2018 guidance, showing Q4/17 revenues and adjusted EBITDA of $2.163 billion and $875 million, respectively.

“2017 was a year of strong progress for Valeant as we delivered organic growth across nearly 75 per cent of the Company while significantly reducing our debt and investing in our Bausch + Lomb, Salix and Ortho Dermatologics businesses,” said Joseph C. Papa, Valeant chairman and CEO, in a statement.

“Since the end of the first quarter of 2016, we’ve reduced our total debt by more than 20 percent, and we will continue to address our debt, as well as reduce expenses,” said Papa. “Additionally, we’re committed to growth through strategic investment in our core businesses, key products and late‐stage pipeline. Altogether, these will get us to the final phase of our strategic plan – the transformation of Valeant.”

But while the Q4 numbers were steady, it’s the company’s outlook for 2018 that troubles Maruoka, who notes that Valeant’s 2018 guidance includes full-year revenue in the range of $8.1 billion to $8.3 billion, which comes in lower than the Street consensus of $8.4 billion.

“Valeant introduced new financial guidance for 2018 that was below our forecasts and consensus, prompting expectations of negative revisions to Street estimates,” says the analyst in a note to clients on Wednesday. “We have lowered our revenue forecast for next year by ~3.9 per cent and our adjusted EBITDA estimate by ~10.4 per cent, coming in at the top-end of the guided range,” he said.

“With lower revenue and modestly higher operational costs (Valeant has guided to higher R&D spending going forward), we forecast some EBITDA margin compression in 2018. Our adjusted EBITDA estimate for next year declines 6.7 per cent from $3.5 billion (41.1 per cent EBITDA margin) to $3.2 billion (38.8 per cent EBITDA margin), also at the high end of the guided range of $3.05 billion to $3.20 billion,” says the analyst.

Maruoka maintains his “Hold” recommendation and lowers his price target from $18.00 to $17.50, representing a total return of 6.8 per cent at the time of publication.