One of Wall Street's big Valeant bulls just swiped a chunk off their price target

Japanese bank Nomura has lowered its price target for Valeant Pharmaceuticals from $220 to $175.

This after the company hosted a conference call meant to address attacks on its business model from legislators looking into price increases, and authorities and investors concerned about the company's former close relationship with a shady soon-to-be-defunct specialty pharmacy called Philidor.

"Valeant's business update call did not address all our outstanding questions; however, management's willingness to be as open as possible in its responses was a positive first step towards rebuilding credibility with investors," wrote analyst Shilbani Malhotra.

"We update our model to incorporate operational disruptions as the company works to rebuild its specialty pharmacy network and deals with pricing issues in its Neurology business."

Philidor distributed Valeant products almost exclusively, contributing to 7% of the company's revenue. Valeant also had paid $100 million for an the option to buy Philidor last December.

However, now that Philidor is out of the picture for Valeant, Wall Street wants to know how the company is going to move that product. Valeant's third largest shareholder, hedge fund billionaire Bill Ackman, suggested on a conference call on Monday that Valeant might announce a solution the following day.

Disappointment

But Valeant had no solutions and few answers regarding the matter on its call on Tuesday. That's why, Malhotra, who has been a big Valeant bull, lowered her target. She still considers Valeant a buy at $82.53.

On Tuesday's call Malhotra asked Valeant CEO Mike Pearson if perhaps he may have acted too quickly in ending its relationship with Philidor last month. Pearson was responding to accusations in a lawsuit uncovered by the Southern Investigative Reporting Institute.

In the lawsuit, a pharmacy that Philidor had purchased a stake in and brought into its "network" called R&O accused the pharmacy of using R&O credentials to access markets where Philidor had been denied a license. It also alleges that Philidor tried to get R&O to sign off for Philidor's sales.

The controversy has contributed to the 52% collapse of Valeant's stock over the last four weeks.

Valeant management has said that the loss of Philidor will be a relative blip on the company's revenue radar.

"I would not be shocked to see some volume declines in the next few weeks," Pearson said on Tuesday. "But I don't think it will be significant."

The company did not give any guidance on the call, saying that all the numbers would come out next month at its investor day, but it did say that it planned to sign a contract with a new specialty pharmacy - one without such a close relationship to Valeant - within 90 days. Then, ideally, everything should get back to normal distribution-wise.

Malhotra isn't convinced the change will be that simple, though (emphasis ours):

The Dermatology business is expected to see a negative impact near term from the company's decision to sever ties with its former specialty pharmacy partner Philidor, given that the specialty channel strategy was initially designed to support the Dermatology business and a significant amount of dermatology volume flowed through that channel.

We note that while the $190mn of revenue that flowed through Philidor in 3Q15 represented just 6.8% of Valeant's total sales, it was mostly driven by the Dermatology business and implies that approximately 40% of total segment revenue was generated through the channel. However, Valeant is seeking new specialty channel partners and expects to have a new alternative fulfillment strategy in place within 90 days.

Given this, management expects Dermatology business performance to return to historical levels by 2H16 as the channel shift is expected to affect net pricing and have a minimal impact on volumes. We have taken a more conservative approach, yet our analysis suggests VRX shares offer substantial upside from current levels.

The issues with Valeant's neurology segment that Malhotra mentioned have more to do with Senator Clare McCaskill's (D-MO) recent inquiry into price increases in two drugs, Nitropress and Isuprel. She sent Valeant a long list of questions about them last month, and also included Valeant in a Senate probe into a number of pharmaceutical companies.

The first hearing in the probe is set for December 9.

Malholtra notes that Valeant is trying to work out relief for patients taking Nitropress and Isuprel through hospitals, but in the meantime, this issue will hurt the segment.

"Given this, the Neuro & Other segment is expected to face near-term pressure as Valeant has engaged in contracting negotiations with hospitals for these products and volumes, and thus sales are expected to decline 20% sequentially in 4Q15," she wrote.

"This near term impact is reflected in our estimates, but we also conservatively assume further erosion in 2016 as the company wishes to work with hospitals and may have to offer concessions to high-volume customers."

In other words, it's going to be a tough fourth quarter.