Valeant And German Rockers 'The Scorpions' Have This In Common (And It's Not Good)

After the news broke it would part ways with CEO Mike Pearson amid new comments the company was concerned about its accounting and internal controls, one analyst at Canaccord Genuity is comparing Valeant Pharmaceuticals Intl Inc (NYSE: VRX) to German rock band "The Scorpions" in a note titled after the group's 1990-era hit "Winds of Change." 

New Info 'Quite Troubling'

"Today’s announcement confirms many of our fears highlighted in our downgrade from three weeks ago," Canaccord's Neil Maruoka wrote on Monday afternoon. "Although Valeant’s press release provides increased visibility over a number of issues currently plaguing the company, we find some of the information contained within quite troubling."

Maruoka highlighted the "most worrying" update: That the company's explanation behind its decision to delay its 2015 10-K was three-fold. "[A]dditional concerns over other potential accounting issues, material internal control weakness, and a poor 'tone of the organization,'" were described as the primary issues.

There Are Some Issues

While shares of Valeant did rise over 14 percent after this information was released, Maruoka isn't buying. The reaction, he said, was due to more transparency "for better or worse." Take a look at the analyst's description of what his team thought after reading the findings of Valeant's Ad Hoc Committee:

"The Blame Game. We are still awaiting the final results of the Ad Hoc Committee’s review; however, additional commentary was provided by the company today that causes us to pause. Most alarming was the Committee’s concerns relating to certain accounting issues, the “tone of the organization”, and the performance-based environment that may have pressured management to meet unrealistic performance targets. Further, the company intimated that “improper” conduct of the former CFO and Corporate Controller resulted in the provision of incorrect information to both the Ad Hoc Committee and the external auditors, which contributed to the required financial restatements. After conducting 70 interviews and a comprehensive review of related documents, the Ad Hoc Committee has determined that certain other accounting issues also require review. The final conclusion of all matters is currently in process and is the chief reason for the delayed 10-K. In addition, the former CFO was also asked to resign as a Director, but has not yet done so."

Maruoka also said the new information likely indicates Valeant's internal controls efforts weren't effective last year.

Canaccord's valuation of the stock, a target of $40, is based on a DCF model that uses a near 16 percent discount rate and a -4 percent terminal growth rate, along with a 7.7x EV multiple to 2016 EBITDA.