Valeant Pharmaceuticals International Inc. Update

VRX : NYSE : US$125.35
Target: US$145

Valeant is a specialty pharmaceutical focused on dermatology,
branded generics, and neurology indications in the US, Canada,
Latin America, Europe and South East Asia. The company
continues to grow through strategic acquisitions highlighted by
the $2.6 billion acquisition of Medicis. In 2010, Valeant
Pharmaceuticals International and Biovail Corporation completed
a merger to form a single Canadian-based specialty
pharmaceutical company.
All amounts in US$ unless otherwise noted.

Life Sciences — Pharmaceuticals
Investment recommendation
Valeant provided 2014 guidance that was in line with consensus. While
cash EPS guidance places the Street estimate near the top end of the
range (we expect consensus to come down modestly), we believe that
higher spending in 2014 will drive medium-term organic growth.
Despite the reinforcement of our positive fundamental view, we believe
that much of the stock appreciation was a result of the company’s
stretch goal to become a top five healthcare company by the end of
2016. As such, we recommend that investors watch for a pullback to
present a more attractive entry point. Nonetheless, we continue to see
substantial upside potential even from current levels and reiterate our
BUY rating.
Investment highlights
 Valeant is investing in growth. Management highlighted R&D and
SG&A expenditures that are expected to drive product launches and
sales force expansion. We believe this spending should amplify
organic growth, which was a key investor concern following Q3
 M&A execution continues to be a key driver. Valeant indicated that
it will pursue smaller tuck-in acquisitions, hopes to complete at least
one larger acquisition this year, and continues to pursue a ‘merger
of equals’ that could accelerate de-levering of the balance sheet.
 Sound familiar? Valeant’s ‘stretch goal’ to become a top five
healthcare company harkens back to Jan. 2012, when a $15 billion
market cap company aimed to reach $50 billion by the end of 2013.
We value Valeant based on a DCF model using a WACC of 8.9% and a
terminal growth rate of 1.0%. We have updated our model following
2014 guidance and, based on this analysis, we arrive at a revised target
of US$145.00 (increased from US$119.00), which supports our BUY rating.


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