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Valeant (VRX) Tops Q4 Earnings, Shares Down on Tepid View

Zacks Equity Research

Shares of Valeant Pharmaceuticals Inc. VRX fell over 13.9% following the company’s dismal guidance for 2017 concurrent with the fourth-quarter 2016 earnings.

We note that the shares of Valeant have underperformed the Zacks classified Medical-Drugs industry in the last one year. The stock lost 79% as compared to the industry’s gain of 3.4%.

The company’s adjusted earnings per share of $1.26 beat the Zacks Consensus Estimate of $1.24. Earnings, however, declined 18.7% year over year on lower product sales.

Total revenue came in at $2.40 billion, beating the Zacks Consensus Estimate of $2.35 billion but declining 13% from the year-ago quarter. The year-over-year decline was owing to a fall in overall product sales in its existing business and negative impact from currency as well as divestitures. Moreover, a decline in pricing also impacted the top line. However, acquisitions completed in 2015 provided some top-line support.

Quarter in Detail

Revenues in the Bausch + Lomb / International segment was $1.16 billion, down 0.9% year over year as incremental revenue gains and slight volume increases from the consumer business in the U.S. and Asia Pacific region were offset by declines in other business units within the segment along with the negative impact of foreign exchange.

Revenues in the Branded Rx segment were $829 million, almost 17.3% decline from $1.0 billion in the year-ago quarter mainly due to due to fall in the Salix and Dermatology business. The GI business was down 17% year over year due to the loss of exclusivity with Glumetza and Zegerid, and the transfer of the Zegerid authorized generic out of the GI business to the diversified segment.

Revenues in the U.S. Diversified Products segment were $398 million, a decline of 31.1% year over year due to lower volumes in neurology which fell 35%. Decreases in realized prices across the neuro portfolio reduced revenue by approximately 15%, and the remaining roughly 20% decline came from lower volumes. Pricing in the neurology business declined due to increased managed care rebates, lower price appreciation credits relative to the prior year, and higher group purchasing discounts provided for products including Isuprel and Nitropress.

Research and development expenses were $93 million in the reported quarter, down 2.1% from the year-ago quarter.

Selling, General and Administrative costs were $658 million compared with $682 million in the year-ago quarter, declining almost 3.5% year over year.

2016 Results

Revenues came in at $9.6 billion, down from $10.5 billion in 2015 but roughly in line with the Zacks Consensus Estimate. Earnings of $5.47 were down from $8.14 in 2015 but in line with the Zacks Consensus Estimate.

2017 Guidance

The company expects total revenue in the range of $8.90 billion–$9.10 billion while the Zacks Consensus Estimate is pegged at $8.97 billion.

During the quarter, the company entered into agreements to divest a number of assets, including CeraVe, AcneFree, and Ambi to L'Oreal for $1.3 billion, Dendreon to Sanpower Group for $819.9 million and other non-core international businesses (Vietnam, Indonesia, and Brazil). The company plans to use the proceeds from the divestiture to pay down its high levels of debt.

On a positive note, the FDA approved its new psoriasis treatment, Siliq. The company also resubmitted its glaucoma treatment, Vyzulta (latanoprostene bunod) in Feb 2017. Meanwhile, the company completed two successful phase III studies on IDP-118, a topical psoriasis treatment. The company recruited and launched a new primary care sales force for Xifaxan. The company also licensed EGP-437 from EyeGate Pharmaceuticals for a new eye care indication.

Our Take

Though the fourth-quarter results of Valeant beat expectations, the guidance for 2017 was disappointing leading to a heavy sell off in shares. The woes do not seem to end for Valeant. Once an acquisition giant, Valeant was caught up in various controversies in 2016-price hike of specialty drugs, erroneous financial reporting and termination of contracts with Philidor Rx Services.

With its new CEO, Joseph C. Papa, Valeant started a rebuilding process.  However, the guidance for 2017 poses concerns about organic growth. The company saw an increase in sales force turnover owing to some voluntary and involuntary changes. Moreover, generic competition for key drugs will continue to impact results. We note that a competitor to drug Nitropress entered the market in Dec 2016.

On Nov 8, 2016, Moody’s Investors Service downgraded the company’s credit rating to B3 from B2. A downgrade will increase the company’s cost of borrowing and add to the existing debt burden. The company is planning to divest 10 businesses for total gross proceeds of up to $2.7 billion and pay down its debt.

Valeant Pharmaceuticals International, Inc. Price and EPS Surprise


Valeant Pharmaceuticals International, Inc. Price and EPS Surprise | Valeant Pharmaceuticals International, Inc. Quote

Zacks Rank & Key Picks

Valeant currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the health care sector include Sunesis Pharmaceuticals SNSS, Celgene Corp. CELG and GlaxoSmithKline plc GSK. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sunesis’ loss estimates narrowed by 5.06% and 8.80% for 2016 and 2017, respectively, over the past 60 days. The company recorded a positive earnings surprise in three of the last four quarters, the average being 0.54%.

Celgene’s earnings estimates increased from $6.55 to $6.60 for 2017 and from $8.13 to $8.16 for 2018 over the last 30 days. The company posted a positive earnings surprise in three of the four trailing quarters with an average beat of 5.08%.

GlaxoSmithKline’s earnings estimates increased from $2.66 to $2.76 for 2017 and from $2.80 to $2.85 for 2018 over the last 30 days. The company posted a positive earnings surprise in three of the four trailing quarters with an average beat of 11.03%. Its share price increased 6.7% year to date.

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