Valeant's Downward Spiral May Continue: Mizuho Says Company Could See $1 Billion In Damages

Valeant Pharmaceuticals Intl Inc’s VRX situation seems to have worsened and the “downward spiral may continue,” Mizuho’s Irina R. Koffler said in a report. She maintained an Underperform rating on the company, with an $11 price target.

Under Criminal Investigation

According to a Wall Street Journal report, Valeant is facing a criminal investigation by the U.S. attorney's office for mail and wire fraud and “obscuring the company's real relationship with Philidor from insurers,” analyst Koffler mentioned.

“This investigation may be a follow on to a similar but separate NJ RICO case that seeks treble damages on "hundreds of millions in sales" during the period from Jan 2013-Nov 2015, with over $500M in sales alleged in 2015 alone,” Koffler noted.

Related Link: One Year Later: Valeant's 90% Fall From Grace

Declining Sales

Valeant has been witnessing a sequential decline in U.S. sales, unlike other companies in the same space. Despite this, the company has reiterated its 2016 guidance, which appears challenging, the analyst commented.

Potential Asset Sale

Koffler expressed concern regarding Valeant’s ability to honor its existing interest coverage ratio covenants, which the company is trying to hurriedly amend. Valeant’s credit could now be perceived as riskier, resulting in the company having to pay higher fees and interest expense for its covenant amendments.

Moreover, Valeant may face more than $1 billion in treble damages from the RICO case as well as any settlement fines linked to the latest criminal investigation.

“These liabilities may force the company into less attractive asset sales at multiples below the aspirational 11x EBITDA contemplated by management to pay the fines rather than allocate the proceeds towards de-levering,” the analyst said.

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