Shares of Valeant Pharmaceuticals (VRX - Free Report) fell more than 7% in morning trading Tuesday, following a key analyst’s warning that the struggling company still has “numerous weaknesses” in its business.
In a cautious note to clients today, Mizuho's Irina Koffler highlighted her concerns about Valeant’s second-quarter investor presentation and lowered her price target for the stock to $7 from $8.
“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,” Koffler wrote.
“Our other main takeaways from the detailed 2Q:17 slides are that the company divested a number of its remaining 2Q:17 growth drivers within B&L International, Dendreon, and Obagi, leaving behind less attractive businesses.”
Despite surpassing the Zacks Consensus Estimate by an impressive 8.25% in the most recent quarter, Valeant still has a massive pile of debt to be worried about. The company has already pared down its debt by about $4.8 billion and looks to be on its way to easily hit its $5 billion target, but as Koffler notes, this could be at the expense of key growth drivers.
Ultimately, Koffler reiterated her “Underperform” rating on Valeant. “We expect Valeant to miss its 2017 revenue and EBITDA guidance, and FactSet consensus 2018 estimates still appear too high,” she concluded.
Koffler’s hesitant note comes just a few days after the news that Valeant might be facing another legal battle. Last week, mutual fund company Lord Abbett & Co. filed a securities fraud lawsuit against Valeant, alleging that it was sold the company’s debt securities at an artificially inflated price based on misleading information provided by Valeant.
Valeant has set aside about $162 million to handle its legal troubles, but with Lord Abbett seeking up to $80 billion in damages—and with Justice Department and regulatory investigations looming—it looks like the company may have underestimated its challenges.
Still, Valeant remains a Zacks Rank #3 (Hold) and currently sports an overall VGM grade of “B.”
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