Valeant’s Morning After—-Default Risk Soars, Next Tyco At Hand

Yesterday’s latest Valeant implosion confirmed something we have warned about all along: sellside analysts are not only completely clueless and utterly useless, they are a threat to your money: instead of at least striving to know everything there is to know about the company under coverage, or at least reading all the available negative literature about VRX (the Citron reports was nothing new: it was based entirely on this report by the Southern Investigative Reporting Foundation which had been public information since the 19th of October, and should have given both the sellside community and the company enough advance notice to prepare its response) all they know how to do is chase momentum, and let price determine both their “recommendations” and their price targets.

Case in point, as we showed before, ahead of yesterday’s implosion, there were 19 Buy ratings, 6 Holds and just one Sell, with an average stock price target of $250.


Well, as always happens after shocking events like yesterday which “nobody could have possibly predicted”, watching the Penguin gallery reel in its humiliation is absolutely worth the price of admission.

Sure enough, there has been a veritable paradop of utterly worthless analyst reports, some defending their wrong calls on the company which until recently was the darling of the hedge fund world, others flipping and admitting they were wrong, while even others are simply dropping the matter entirely (such as Susquehanna’s Andrew Finklestein) who have decided to drop coverage altogether when things get messy.

Here, courtesy of Bloomberg, is a snapshot of the major banks’ reactions “the morning after.”

NOMURA (Shibani Malhotra)

  • “Our own diligence suggests” report is not accurate
  • VRX has stated it books specialty pharmacy rev. only when they have been dispensed
  • View current weakness as buying opportunity
  • Rates buy, PT $290

SUSQUEHANNA (Andrew Finkelstein)

  • Suspending coverage due to scrutiny, not crediting any specific allegation
  • “Expect significant volatility will continue challenging this framework”
  • “Door is now wide open to questions about any number of business practices”

BARCLAYS (Douglas Tsao)

  • Market overreacted to report
  • VRX response addressed concerns about rev.
  • Important to note not all VRX volume through specialty pharmacies goes through Philidor
  • Rates overweight, PT $300

DEUTSCHE BANK (Gregg Gilbert)

  • Cautious due to uncertainties with U.S. drug pricing, VRX’s specialty pharmacy distribution model, related government inquiries
  • Expect new investors will want detailed understanding of co.
  • Important to see how co. deals with “period of adversity after a long period of significant success”
  • Rates hold, PT $204

BANK OF AMERICA (Sumant Kulkarni)

  • Will continue to monitor; no change to model
  • VRX will remain volatile, require clearer articulation from mgmt about risk
  • Continue to like VRX’s diverse business mix
  • Rates buy, PT $290

JPMORGAN (Chris Schott)

  • “Effectively see no impact from these headlines to other companies in our coverage”
  • Understand that VRX books rev. after shipment to end customer
  • Accounting method limits VRX’s ability to “stuff the channel,” ship excess inventory
  • Rates overweight, cuts PT to $265

MORGAN STANLEY (David Risinger)

  • If allegations wrong, depressed shrs are buying opportunity
  • VRX response did not address claims about questionable Philidor relationships with other pharmacies
  • Broader concerns about specialty pharmacy “overblown”
  • Rates equal weight, PT $200

UBS (Marc Goodman)

  • VRX clarification should help investor confidence
  • Expect shrs to recoup lost ground
  • Surprised by reaction, VRX addressed most issues in recent conf. call
  • Rates buy, PT $285

Here are some of the more amusing report covers saved here for posterity’s sake:

First, DB with the best summary of Valeant’s day to day existence:


BMO flips, amazingly no longer sees VRX hitting $265:


And the best one: here is BTIG with the “head in the sand” routine:


And while the above is meant to put a smile on the faces of all those longs who may otherwise be suicidal after the company’s stock price has been cut in two in about a week, the sad reality for the company is that things are not only in crisis mode, but are likely going far, far worse. Case in point, the former CEO of Medtronic Bill George who said he’s been saying for three years that Valeant business model makes “no sense” during a CNBC interview.

“I see it more as a house of cards. I’m afraid it’s going the Tyco direction” adding that it “may take 12 years for VRX to transform business model to focus on R&D, saying “There’s a lot of smoke there.”

As of this moment, the bond market is agreeing with George: the spread on Valeant bonds, courtesy of Markit, is approaching a record 700 bps…


…and with Valeant CDS now trading 650, it means Valeant is now facing a nearly 50% probability of default in the coming 5 years.


We hope investors in Bill Ackman’s Pershing Square can sleep well at night knowing that his biggest investment has a coin toss’ chance of going broke in the near future.

Source: The Morning After: Valeant Default Risk Soars After Called Next “Tyco”, Sellside “Analysts” Humiliated | Zero Hedge