Mizuho's Valeant Calculation: DCF + SOTP = $18/Share

News of Valeant Pharmaceuticals Intl Inc VRX's downgrade at Mizuho is circling Wall Street on Monday, largely because of the firm's Street-low price target of $18 per share. How did Mizuho get to this valuation?

Let's take a look.

According to analysis from Irina Koffler, Valeant's sum-of-the-parts is worth $21 per share, which includes lowered sales multiples on the company's dermatology segment (6x to 3x) and its Salix business (6x to 4.5x), along with its Other Generics division (3x to 1x).

"These adjustments reflect our anticipation of lower margins across all of the company’s segments associated with significant payer rebating, and the resulting loss of attractiveness to potential acquirers," she added.

"We don’t think that management can negotiate attractive multiples for its assets in the current market environment and, furthermore, many of the segments have likely been damaged by pricing and employee exits, and may face significant rebating in the future."

Koffler's DCF valuation values Valeant even lower, at about $15 per share. That value is based on a $1.2 billion estimate of fines and legal defense costs, along with a terminal growth rate of -3 percent and a decrease in discounted cash flows by $1.1 billion over the next four years.

"We expect this litigation [between Ohio and Iowa retirement systems, an Allergan employee and Valeant, Mike Pearson and Bill Ackman] to create yet another overhang on the company’s use of cash, as well as to cast doubt on the suitability of existing management and board members," the analyst concluded.

Koffler's $18 price target is a 50/50 mix of her DCF ($15) and SOTP ($21) values.