VRX Valens Credit Analysis – Robust cash flows relative to operating obligations, sizable market capitalization, and strong Uniform ROA levels indicate that ratings agencies and credit markets are overstating credit risk

• Credit markets are materially overstating VRX’s credit risk with a CDS of 568bps and YTW of 8.235% relative to an Intrinsic CDS of 414bps and an Intrinsic YTW of 5.935%. Furthermore, Moody’s is materially overstating the firm’s fundamental credit risk with their highly speculative, high-yield Caa1 credit rating, five notches lower than Valens’ HY1 (Ba2) rating
• Incentives Dictate Behavior™ analysis highlights management has low change-in-control compensation, indicating that they are less likely to accept a buyout or pursue a sale, reducing event risk for creditors. Furthermore, compensation based on EBITDA, revenue, and ROTC should lead to improved growth, asset utilization, and margins, a positive for creditors
• Equity markets are pricing in expectations for a material Uniform ROA compression, with valuations relative to UAFRS-based (Uniform) Earnings at their lowest point since 2009. VRX shares have fallen materially amid concerns about the accuracy of VRX’s financial statements and concerns about the pharmaceutical industry as a whole. As such, the firm is likely undervalued if they can just maintain profitability going forward