Mizuho Upgrades Valeant To Buy, Says Its 'Volkswagen Event' Has Played Out

• Valeant Pharmaceuticals Intl Inc VRX shares are down 23 percent year-to-date, having plunged 45 percent since September 28.
• Mizuho’s Irina R. Koffler upgraded the rating on the company from Neutral to Buy, while maintaining the price target at $155.
• Although there is greater transparency related to the investigation, shares may remain volatile in the near term, Koffler mentioned, while adding that the stock could be more resilient going ahead.

Following the recent investor call, there is increased transparency related to Valeant’s internal investigation and Big 4 audit, and the Philidor indemnification, “which could off-load some legal risk,” analyst Irina Koffler said.

Koffler believes that the company “has taken the appropriate steps to deal with political and industry criticism by promising to end its former pricing practices and raise R&D investment.”

While saying that Valeant’s share price could continue to be highly volatile and may be range-bound in the near term, with investors waiting for the results of the internal audit, Koffler added, “…we believe that VRX's "Volkswagen event" has largely played out.”

Valeant reiterated its 2016 EBITDA guidance of $7.5 billion. “We prefer a more conservative outlook on the business in case VRX has to reduce inventories of its highly priced products or disrupt operations within Philidor,” the analyst commented.

The 4Q15 revenue estimate has been reduced from $3,322.2 million to $3,055.3 million. The R&D spend estimate for 2016 has been raised from $400 million to $470 million. The EPS estimates for 2015 and 2016 have been reduced from $11.68 to $11.27 and from $16.09 to $14.83, respectively.

Since Valeant no longer plans to spin off the ‘Neuro & Other’ business and revenue within this segment is expected to decline over time, the company’s 2016 EBITDA is estimated in the $6.8 billion range, which “represents a conservative view of the business,” Koffler mentioned.

“While VRX could be subject to more negative media coverage as we await the results of its internal audit, we think it could be more resilient going forward even if the Street lowers estimates,” the Mizuho report added.