GOLDMAN: We're downgrading Valeant - we didn't think it would get this bad

Goldman Sachs analysts have lost confidence that Valeant Pharmaceuticals' management will fix things.

For now.

Since October 21, when Citron Research published its report about Valeant's relationship with specialty pharmacy Philidor, shares have dropped 36%. Citron alleged that Valeant used Philidor to file fake invoices that made its revenues look bigger than they actually were.

And on Monday, Goldman lowered its rating on Valeant's stock to "Neutral" from "Buy," and cut its 12-month price target 32%, to $122 from $180.

Goldman's Gary Nachman and team wrote in a note to clients:

Given that so many questions about certain aspects of VRX's business model have been raised (e.g., scrutiny on pricing, specialty pharmacies, M&A), we have less confidence that the market will reward the stock anytime soon without clarity as to the path forward. As these events have unfolded we underestimated the extent of the collateral damage to the perception of the company and the resulting confidence in the stock.

The stock was up nearly 4% in pre-market trading on Monday to around $97.25 a share.

Goldman's reasons for cutting its rating were essentially threefold.

The firm was surprised that investors did not react more positively to news Friday that Valeant was ending its relationship with Philidor and taking responsibility for all the uproar. Goldman thought the stock would rally on that news; instead, it dropped nearly 16%.

Additionally, Goldman isn't sure how much of a risk the Philidor situation will pose to Valeant's overall business.

Goldman lowered estimates for Valeant's fourth-quarter revenues by $153 million, or 5%. The company's relationship with Philidor made up 6.8% of third-quarter revenues.

And finally, Valeant is not the most attractive name that investors who want in on healthcare can buy. The specialty pharmacy sector's valuation, measured by the 2016 price-to-earnings ratio, fell to ~12x from about 17x some months ago. Buyers can get companies with "cleaner stories" that may also have attractive valuations, they wrote.

Goldman again:

We continue to believe that longer term VRX's fundamentals could justify a much higher valuation, but risk/reward in the stock in the near-to-medium term is less clear. We expect a much longer road than we previously thought for the dust to settle and for VRX to be able to regain enough investor confidence to attract a sufficient amount of new money into the stock.

Citron Research's Andrew Left is set to release an updated report on Valeant today, although he said it won't be "anything earth-shattering."