Morgan Stanley Cuts Valeant's Target To $25, Admits It Got A Couple Things Wrong

Morgan Stanley has slashed its price target on Valeant Pharmaceuticals Intl Inc VRX shares by $17 to $25, saying it underestimated generic pressures on the company's older franchises and the risk of an ex-U.S. franchise slowdown.

The latest action follows Valeant’s poor third-quarter results and guidance cut.

Morgan Stanley too cut its 2017 revenue forecast to $9.3 billion from $10.1 billion, EBITDA to $4.0 billion from $4.9 billion and EPS to $5.31 from $7.36.

Looking ahead to 2020, the brokerage slashed its revenue view by 9 percent to $10.4 billion, EBITDA estimate by 17 percent to $4.8 billion and EPS forecast by 26 percent to $7.53.

However, the brokerage maintains its Overweight rating on the stock.

Justification For Staying Overweight

“Valeant's fundamental earnings power is less than we predicted, but we still expect divestitures to facilitate debt pay down this winter and the turnaround to continue,” analyst David Risinger wrote in a note.

That said, new chief financial officer Paul Herendeen expects loss of exclusivity in neurology (mainly Isuprel and Nitropress) and more competition in generics to weigh on 2017 sales.

Over the long term, however, the company expects B+L and Branded Rx segments (together accounting for about 80 percent of total revenue) revenue to grow mid-single digits and EBITDA to rise in the high-single digits.

A Look Ahead

Risinger lists the following key catalysts to watch:

1. “Potential divestitures and implications for debt paydown this winter.”
2. “Brodalumab (psoriasis) FDA approval (PDUFA date: 2/16/17).” The analyst awaits clarity on the severity of the REMS (risk evaluation and mitigation strategy) for suicidal ideation.
3. “2017 financial guidance - likely in February 2017.”
4. “Ph 3 data on IDP118 (topical drug for moderate to severe plaque psoriasis) in 2Q17.”
5. “Potential FDA approval of Vysutta (glaucoma) in mid-2017.”

Shares of Valeant closed Wednesday’s trading at $16.09.Early in the pre-market hours Thursday, they gained 1.55 percent to $16.34.