Pershing announced it sold its entire stake in Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), mainly attributed to a disproportionately large amount of time and resources required to manage the investment and a decision to realize a large tax loss and dedicate more time to the rest of the portfolio. Considering all of Pershing's efforts to create a turnaround situation with the new management team, BMO Capital Markets believes this "throwing in the towel" at these levels sends a poor signal regarding the road ahead for VRX. BMO Capital Markets lowers its target to $15 from $19. Retain Market Perform.
Understanding Pershing's need to manage its portfolio as it deems appropriate and considering its public endorsement of VRX's new management team that it helped put in place, the firm still thinks it's hard to interpret Pershing's decision at this time as anything but a realization that this turnaround situation may end up taking a lot more time and perhaps have greater challenges than originally anticipated. The timing of this decision is particularly noteworthy since new management is just beginning to implement a number of its strategic initiatives, including asset sales to help pay down debt, pipeline approvals and new launches, and a primary care effort behind key product Xifaxan to accelerate that product. This was a time when it would have been more ideal for the top shareholder to continue to support these efforts rather than "throw in the towel" when the stock is so depressed.
Pershing Square CEO Bill Ackman and Vice Chairman Steve Fraidin will remain on the VRX board until the upcoming annual meeting but will not stand for re-election. Pershing was instrumental in helping bring VRX's new management in place, and the firm expects it will continue along the stated path from an operational standpoint. Thus, BMO Capital Markets is not changing its estimates at this time. BMO Capital Markets recently lowered its estimates meaningfully after VRX's 2017 guidance. Given this latest development, the firm believes it is prudent to haircut its terminal multiple for VRX and take a more cautious view on the sustainability of the business.
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