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Stock Strategist

Valeant's Ambitious 2016 Goal Excites Investors

While guidance for 2014 meets expectations, Valeant sets its sights on becoming a top-five global pharmaceutical company.

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Valeant's (VRX) 2014 guidance, released Jan. 7, was in line with our estimates, but the big news that caught investors’ attention was management’s new goal for the company to become a top-five global pharmaceutical company based on market cap by the end of 2016. Management expects this to require about a $150 billion market cap, up significantly from Valeant’s current $40 billion market cap. While this goal isn’t too surprising to us--CEO J. Michael Pearson had already stated in a letter to employees that he aims for Valeant to become the biggest health-care company in the world--investors seemed pleased to see such an ambitious objective become one of the company’s official targets, and one to which management compensation is benchmarked.

We wouldn’t read too much into the goal, since it will be driven largely by the amount of equity used in futures deals, and could actually act counter to investors’ best interests. We have an Exemplary stewardship rating on Valeant and believe the firm looks out for investors’ best interests, but it could in theory achieve its goal by consistently overpaying for deals with equity, which would harm investor returns.

David Krempa does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.