Valeant Pharmaceuticals International’s (VRX) third quarter 2011 earnings of 62 cents per share (excluding special items but including stock based compensation expense) beat the Zacks Consensus Estimate by 5 cents and the year-ago earnings by 20 cents per share. The bottom-line growth was driven by higher revenues.
Revenues for the quarter were $600.6 million, above the Zacks Consensus Estimate of $571 million, driven by strong product sales. Revenues were way ahead of the prior-year figure of $208.3 million. The improvement in revenues over the prior year was primarily due to the September 2010 merger of Valeant Pharma with Biovail Corporation. Results for the third quarter of 2010 only reflect legacy Biovail revenues and do not include any revenues from legacy Valeant. Organically, (excluding the impact of one-time revenues, acquisitions and foreign exchange), revenues grew 15% over the year-ago quarter.
Quarterly Highlights
Product sales amounted to $570.4 million during the reported quarter, compared with $201.4 million in the prior-year quarter. The increase in revenues was due to robust growth in the US Dermatology segment as well as the branded generics divisions, both in Europe and Latin Americas.
Research & development (R&D) expenses climbed to $17.5 million, reflecting a year-over-year increase of approximately 27%. Selling, general & administrative (SG&A) expenses for the third quarter increased 124.0% to $134.8 million.
Share Repurchase Program
Valeant Pharma repurchased 1.8 million common shares in the third quarter, bringing the total share repurchased to 13.7 million shares in 2011. The current share repurchase program expires on November 7. The company’s board of directors has approved a new repurchase program of $1.5 billion that will be effective from November 8 for 2012. Under the program, Valeant Pharma can repurchase $1.5 billion of its convertible notes, senior notes, common shares and/or other debt or shares that may be issued prior to the completion of the new share repurchase program.
Outlook
Following the release of the third quarter results, Valeant Pharma narrowed its guidance for 2011. The company now expects earnings to come in the range of $2.80 – $2.95 per share from the prior expectation of $2.70 – $3.00 per share in 2011. The Zacks Consensus Estimate of $2.63 is below the company’s targeted band. For the fourth quarter, earnings are expected to range between $0.80 and $0.95 per share.
The full year guidance was revised to exclude the impact of a potential $45 million milestone payment to be received from partner GlaxoSmithKline (GSK) on launch of pipeline drug Potiga. Potiga, which was approved in June 2011 for use as an adjunctive treatment of partial-onset seizures, is now expected to be launched in the first quarter of 2012, later than prior expectations of a launch by the end of this year. The guidance also assumes that Valeant Pharma will not generate any revenue or earnings from Ortho Dermatologics, a dermatology unit of pharma giant Johnson & Johnson (JNJ) or Dermik, a dermatology unit of Sanofi Aventis (SNY) in 2011. Valeant Pharma has entered into agreements to acquire these units. The transactions are expected to close by the end of the year.
Additionally, the company expects to book organic growth of at least 8% in 2011. Management believes it is on track to achieve this goal. Valeant Pharma also expects to generate over $900 million from cash flow from operations in 2011.
Our Recommendation
We have a Neutral recommendation on Valeant Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run.
Valeant Pharma in its current form emerged from the merger of Biovail and Valeant in September 2010. Overall, we believe the combined Biovail/Valeant entity is a unique company as it offers global reach, a diversified revenue base, a favorable tax structure and limited patent exposure. Moreover, accretive acquisitions add to the company’s investment thesis. Despite the string of recent purchases, the company is however not being able to clinch big deals. We presently prefer to remain on the sidelines.
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