Valeant 'Still Stuck In The Weeds,' Morgan Stanley Slashes Estimates

Valeant Pharmaceuticals Intl Inc VRX reported a 1Q16 EPS miss and reduced its full-year guidance. Morgan Stanley’s David Risinger maintained an Equal-weight rating for the company, with a price target of $36.

Analyst David Risinger commented that Valeant was a complex story with several moving parts. Moreover, there was uncertainty around key franchise growth prospects and how much dilution the divestitures would cause.

Lowering Estimates

Valeant reduced its 2016 guidance much more than was expected. Risinger lowered the revenue estimate from $11.1B to $9.9B. He expects the company to witness margin pressures from reduced pricing and negative mix shift, and reduced the EBITDA estimate from $5.7B to $4.8B.

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“Our estimates are at the low end of management's new guidance ranges, as we believe execution and a 2H ramp remain show-mes,” the analyst wrote.

Overstatements In Guidance

Although management indicated that their guidance avoided overstatements, they have built in ~$0.50 of EPS to reflect the resolution of issues in dermatology as well as 2H growth acceleration in Salix.

“We view this "fix" as a show-me, since more payers could continue to institute prior authorization requirements, and it is uncertain how effective VRX's third-party vendor (CoverMyMeds) will beat clearing prior authorization hurdles,” Risinger said.

Since shares are trading at all-time lows, valuation appears cheap. However, valuation cannot be the sole reason to be bullish on Valeant, given the ongoing uncertainty, the analyst pointed out.