Valeant Has 58% Chance Of Bankruptcy, New Analysis Shows

In a new report, Wells Fargo analyst David Maris slams Underperform-rated Valeant Pharmaceuticals Intl Inc (NYSE: VRX) because of a number of unanswered questions surrounding its business and balance sheet. After a horrendous several months, Wells Fargo is bullish on specialty pharmaceutical stocks as a whole, but Valeant is a strong exception.

In his report, Maris uses a balance sheet analysis technique called the Altman Z-score model, which was developed by Edward Altman in the 1960s as a way to measure the probability of bankruptcy. According to Maris, an Altman Z-score below 1.8 is a signal of financial distress, and Valeant’s Altman Z-score has been below this threshold for each of the last five years. Valeant’s current score is only 0.79, which suggests a bankruptcy probability of 58.4 percent.

“While the Altman Z-score may produce false positives, its predictive accuracy is greater than 70% two years prior to bankruptcy,” Maris explains. “Even so, we consider this ratio as a signal for further questioning.”

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In addition to Valeant, Wells Fargo used Altman Z-scores to calculate the bankruptcy probabilities of Valeant’s pharma rivals as well. At 39.9 percent, Allergan plc Ordinary Shares (NYSE: AGN) was the only other name with a probability higher than 6.9 percent.

Benzinga reached out to Valeant for but no one was available to comment on the report.

Disclosure: the author holds no position in the stocks mentioned.