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Why Valeant Pharmaceuticals Intl. Inc. Shares Tumbled on Monday

By Sean Williams – Feb 22, 2016 at 6:02PM

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Valeant shares swooned 10.7% on Monday following negative analyst commentary, but took a separate hit in the extended trading session on word of a possible earnings restatement.

What: Shares of Valeant Pharmaceuticals (BHC -2.51%), a developer of pharmaceutical products and medical devices around the globe, tumbled as much as 15% during Monday's trading session following negative analyst commentary. Shares finished the session lower by 10.7%.

So what: Monday actually marked the second-consecutive day that Valeant shares were punished following a note from Wells Fargo's covering analyst David Maris. After initiating coverage on Valeant with an "underperform" rating on Friday, Maris came back with another note on Monday detailing two new valuation models, one of which suggested Valeant could be worth $62 per share, or a 27% haircut from where the company closed on Friday.

According to Maris, via Bloomberg, "Valeant shares currently carry too much risk for us to be comfortable recommending them."

Making matters worse, after the closing bell on Monday, it was reported by CNBC that an internal review of Valeant's specialty pharmacy Philidor Rx Services would likely result in a restatement of earnings. Shares of Valeant were lower in extended trading following its $75.92 closing price.

Now what: Valeant shareholders have had an awful lot of news to digest in a short amount of time recently, and the press releases just keep on coming.

Image source: Centers for Disease Control and Prevention.

On one hand, analyst commentary rarely tends to be thesis-breaking news. While some analysts do indeed take a long-term mindset, oftentimes their price targets and valuation models are geared for the short term. While it's always a good idea to take in what concerns analysts might have with a company, and analyze whether those concerns would affect the long-term business model of a company, stock ratings and price target changes are often short-term price drivers that can be mostly overlooked.

The more-pressing issue will concern a possible earnings restatement, and whether or not Valeant's drug-pricing practices are vindicated in the eyes of Congress. Valeant, which has grown into a pharmaceutical giant by making acquisitions and occasionally hiking prices on purchased therapeutics, is currently under the close scrutiny of Congress's watchful eye, and it's always possible that adverse repercussions could come about stemming from the way it's priced certain drugs, such as cardiovascular products Isuprel and Nitropress.

Investors will want to keep a close eye on Valeant for any new developments in the coming days and weeks.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends Valeant Pharmaceuticals and Wells Fargo. It also has the following options: short March 2016 $52 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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