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Sans Regulatory/Legal Risks, Valeant Is Worth $35


Ex-Philidor Valeant's run rate revenue and EBITDA are $10.4B and $5.1B, respectively.

Its business model appears broken. Valeant is cutting prices and is expected to tamp down on acquisitions. Future organic growth could be constrained.

Valeant has an enterprise value of $55B or nearly 11x run rate EBITDA. 8x EBITDA is more appropriate given its limited growth prospects.

8x EBITDA equates to an EV of $41B. Less $29B net debt, its equity value would be about $12B or $35 per share.

VRX is overvalued by at least 50%. Avoid the stock.

VRX on the NYSE. Source: Reuters

Valeant (NYSE:VRX) has been the talk of the financial markets over the past three weeks. In late October, Andrew Left of Citron Research accused the company and its specialty pharma affiliate, Philidor, of channel stuffing. Since, new revelations have surfaced almost daily. The Wall Street Journal reported on Philidor's aggressive sales practices and pharmacy benefit managers subsequently dropped it from their networks. VRX is down about 40% for the year, and down over 50% since Citron's short article in late October.

There has been a lot of back and forth about whether now is the right time to buy or if the stock will fall further. At $75, VRX is cheap in comparison to its 52-week high of $263; based on future earnings, the stock is hardly cheap. I decided to end the debate by doing a bottoms up valuation.

Valeant Ex-Philidor

The first place to start in valuing the company is to exclude the revenue and EBITDA contribution from Philidor. After CVS (NYSE:CVS), Express Scripts (NASDAQ:ESRX) and UnitedHealth's (NYSE:UNH) OptumRx dropped Philidor from their networks, Valeant cut ties with the specialty pharma.

The above chart highlights the company's run rate EBITDA with and without...