Valeant Pharmaceuticals (VRX) took a beating Monday after the Canadian drugmaker announced adjustments to its quarterly earnings -- but shareholders who dumped shares may have overreacted, potentially leaving behind an attractive opportunity in the market, according to one investment firm.
"Earnings restatements should never be taken lightly; we think Valient management's credibility will suffer in the near term, but we expect the market will be relieved by the relatively minor restatements to earnings that the company disclosed on Monday night," Barclays (BCS) analysts Douglas Tsao and Morgan Williams said in a Tuesday report.
Barclays maintains an Overweight position on Valeant, the equivalent of a Buy, and a $135 price target.
Valeant's decline was primarily the result of anxiety that the company would delay the release of its annual filing with the Securities and Exchange Commission, but many fears were largely quelled when it scheduled a preliminary earnings call next Monday, according to Barclays.
"Importantly, rather than restating financials to say revenue was improperly recognized altogether ¿ the concern voiced to us on Monday afternoon by some investors ¿ VRX's restatement merely shifts roughly $58 million from the second half of 2014 into 2015, reducing 2014 GAAP earnings per share by $0.10 and increasing 2015 GAAP EPS by roughly $0.09," the analysts said. (GAAP stands for Generally Accepted Accounting Principles, a standard system of bookkeeping published by the Financial Accounting Standards Board.)
The adjustments largely concern Valeant's combination with specialty pharmaceuticals distributor Philidor, after Valeant said about $58 million in sales were not booked appropriately.
"Correcting the misstatements is expected to reduce reported 2014 GAAP earnings per share by approximately $0.10 and increase 2015 GAAP earnings per share by approximately $0.09," Valient said in a statement Monday. "Following entry into the option to acquire Philidor in December 2014, the Company began to consolidate Philidor's accounts and began to recognize sales to Philidor only when dispensed to patients, and no similar adjustments would be necessary for sales after that date."
But shareholders are likely in for a pleasant surprise as the restatement does not justify such a severe drop in share prices, "though certainly confidence in management will be hurt," Barclays analysts wrote. "This will give potential new investors pause before coming in from the sidelines. Even those who see value at current levels might wait until the dust settles before getting involved."
Valeant shares, which are down 62% over the past 12 months, were up 10% in early trading Tuesday.