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Valeant Pharmaceuticals Earnings Up Y/Y, View Lowered

Zacks Equity Research

Valeant Pharmaceuticals’ (VRX) reported second quarter 2014 cash earnings per share of $1.91 (excluding special items and non-cash expenses), up from the year-ago earnings of $1.34 per share.

Excluding stock-based compensation expense, earnings per share came in at $1.90. The Zacks Consensus Estimate for the second quarter was $1.91.

Revenues for the quarter soared 86.3% year over year to $2.0 billion due to the acquisition of Bausch + Lomb in 2013. Revenues were in line with the Zacks Consensus Estimate.

Quarterly Highlights

Product sales at Valeant amounted to $2.0 billion during the second quarter, up 87.5% year over year. Growth in sales was driven by a rebound in the emerging markets of Europe, strong results in Asia, and solid performance of the contact lens and consumer businesses of Bausch + Lomb in the U.S.

Total sales from developed markets jumped nearly 85% year over year to $1.5 billion buoyed by the acquisition of Bausch + Lomb.

Same-store organic product sales increased 4%. During the quarter, Valeant launched 17 new products in the U.S.

Excluding the impact of generics for Retin-A Micro and Vanos franchises in the U.S., and Wellbutrin XL in Canada, same-store organic product sales increased 10%.

Sales from emerging markets grew 89.7% year over year driven by the acquisition of Bausch + Lomb.

Research & development (R&D) expenses jumped 171.4% to $66.5 million. Selling, general & development (R&D) expenses almost doubled to $515.7 million due to the launch of numerous products and efforts to significantly increase the size of sales forces.

We note that Valeant acquired Bausch + Lomb in Aug 2013 to strengthen its ophthalmology business, which was a miniscule portion of Valeant’s overall portfolio.

Allergan Acquisition

Valeant has been relentlessly pursuing Allergan (AGN) since Apr 2014. On Jun 18, 2014, Valeant announced that it has commenced an exchange offer for the common stock of Allergan, Inc. after the latter rejected its previous offer a couple of times.

As per the terms of the offer, shareholders of Allergan could exchange each of their shares for $72.00 in cash and 0.83 shares of Valeant common stock. Allergan shareholders can also opt for cash and a number of Valeant shares, subject to proration.

Earlier in the month, Valeant sold some of its injectable products (Restylane, Perlane, Emervel, Sculptra, and Dysport) to Galderma for $1.4 billion. Valeant expects to use the funds from the divestment of assets for the potential Allergan transaction and other future business development opportunities.

Allergan, a global multi-specialty pharmaceutical company, develops and commercializes innovative products for eye care, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological and other specialty markets.

Guidance Update

Valeant lowered its guidance for 2014 to include the impact of divestiture of some of its injectables. Revenues are now projected in the range of $8.0 billion and $8.3 billion, down from the earlier projection of $8.3 billion – $8.7 billion and short of the Zacks Consensus Estimate of $8.4 billion. Earnings per share, on a cash basis, are now projected between $7.90 and $8.10, compared to the earlier projection of $8.55 – $8.80 per share.

Our Take

Valeant currently carries a Zacks Rank #3 (Hold). Second quarter results and the subsequent lowering of guidance were disappointing.

Valeant, a Canada-based specialty pharmaceutical company, has been quite aggressive on the acquisition front in the last two years, which contributed to its solid growth. Dermatology is the key focal area for Valeant.

In Apr 2013, Valeant acquired Obagi Medical Products. In Dec 2012, Valeant acquired all of the outstanding common stock of Medicis Pharmaceutical Corporation. Apart from dermatology, Valeant is also keen on developing its ophthalmology portfolio. In Aug 2013, Valeant acquired Bausch + Lomb Holdings Inc. for $8.7 billion in cash.

However, Allergan has made it clear that it is reluctant to accept Valeant's offer. We expect investor focus to remain on further updates from Valeant and Allergan on the acquisition proposal.

Right now, stocks like Salix Pharmaceuticals (SLXP) and AstraZeneca (AZN) look well placed in the healthcare sector. Both carry a Zacks Rank #1 (Strong Buy).

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