Lowering Valeant's Fair Value Estimate

We're lowering our fair value estimate for

Media investigations suggest more blatant issues of wrongdoing in Valeant's specialty pharmacy, Philidor. Additionally, the major pharmacy benefit managers, including

Management announced it will discontinue its relationship with Philidor. As a result, we're reducing our revenue forecast. We're also reducing our fair value in acknowledgement that the company's cost of capital has risen as credit spreads on the company's debt have widened.

We still place fair odds that management can successfully navigate these issues, but the company's beneficial access to capital markets will likely remain constrained until financial leverage improves. We now estimate adjusted EBITDA and EPS for 2016 at approximately $6.9 billion and $14.50, respectively, with our new fair value estimate at $160.

Assuming no other major material weaknesses in the business, Valeant should still produce close to $4 billion in operating cash next year and maintain its ability to service debt. We also plan to revisit our assumptions around Valeant's narrow-moat rating, but we still view a considerable portion of the company's Bausch & Lomb, Salix, consumer health, and international assets as moat-worthy.

We reiterate that investors need to remain very cautious with an investment in Valeant, particularly since negative media headlines will persist, but the stock will continue to look undervalued. As we previously have pointed out, the remaining 93% of Valeant's business that is not related to specialty pharmacy still appears mostly healthy.

Predicting Valeant's ultimate outcome through this challenge is difficult, but the company's ability to post modest growth, service debt, contain specialty pharmacy concerns, and restore market credibility should eventually improve the firm's outlook.

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