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Healthcare

Valeant Pharmaceuticals Intl Inc (VRX) Shares Not Investible Despite Amended Credit Facility: Analyst

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The Country Caller explains why this analyst remains skeptical on Valeant shares despite the announced credit amendment

After raising his price target on Valeant Pharmaceuticals Intl. Inc. (NYSE:VRX) shares to $22 last week, Piper Jaffray analyst David Amsellem has now reaffirmed his price target and Underweight rating on the stock. The analyst has updated his thesis on Valeant shares after the company announced an amendment to its credit facility yesterday.

The drug maker revealed yesterday that its creditors have allowed it more time to pay back the $31 billion debt it has on its shoulders. CEO Joseph Papa plans to sell non-core assets to make a large payment this year, as he revealed during the company’s second quarter earnings call last week.

While Morgan Stanley believes this news would be good for the company, the Street does not believe so. Valeant shares closed down 2.7% yesterday at $29.19. Piper Jaffray analyst acknowledged that this agreement does give the company “more breathing room” but he still believes the stock remains “uninvestable.”

Mr. Ansellem said that the stock trades at 8.4 times his enterprise value/earnings before interest taxes depreciation and amortization 2016 (EV/EBITDA 2016) estimate, based on the company’s $4.8-4.95 billion guidance it issued two months ago. Explaining his bearish outlook on the stock, the analyst said that expectations for Valeant’s recovery in the second half of 2016 remain “overly optimistic.” He also said that the non-core asset sale, even if the company goes through with one, would not stabilize shares, and that EBITDA is unlikely to stabilize beyond 2016.

In order to explain his cynical view on potential asset sales, the analyst said if the company sells the assets for $8 billion at 11 times approximate EBITDA, like it said it would in its earnings call, EBITDA would fall to $4.07 billion, taking Valeant’s overall debt down to $22.8 billion. That, according to the analyst, would translate into a pro forma debt/EBITDA ratio of 5.6 times, which would still be very high, and a pro forma EV/EBITDA ratio of 7.9 times, which would be unattractive owing to the overall pressure on the venture. Mr. Ansellem said: “Put another way, given these dynamics, why would the shares be rewarded for the execution on the potential divestitures that management already cited?”

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