Canadian pharmaceuticals company Valeant Pharmaceuticals International, Inc. (VRX) recently announced preliminary fourth quarter and full year 2011 results as well as issued 2012 guidance.
Fourth Quarter and Fiscal 2011 Guidance
The company expects to book organic growth of at least 8% in the fourth quarter of 2011 with total revenue of more than $650 million. In the quarter cash earnings are expected to range between 83 cents and 87 cents per share (prior guidance: 80 cents-95 cents). Foreign exchange is estimated to have a negative impact of $40 million on the top-line and 5 cents on earnings. Moreover, adjusted cash flow from operations is anticipated to be greater than $230 million.
For full year 2011 Valeant Pharma expects total revenue growth of 27% over 2010 levels. Product sales are also expected to grow 27% over 2010. However, in organic terms (excluding the impact of one-time revenues, acquisitions and foreign exchange), the company maintained its previously provided guidance to grow 8% year over year. Adjusted cash flow from operations is expected to rise 39%.
2012 Guidance
For 2012, total revenue is expected in a range of $3.1–$3.4 billion, representing an increase of 30-40% over 2011 levels. Cash earnings are expected to come in a band of $3.95–$4.20, representing an increase of 40–45% over 2011 levels. However, neither the top- nor the bottom-line includes the potential negative impact from currency fluctuations which was primarily a tailwind in 2011. The 2012 guidance also excludes the effects of potential acquisitions in 2012. The guidance however takes into account the $45 million milestone payment to be received from partner GlaxoSmithKline (GSK) on launch of Potiga. Potiga, which was approved in June 2011in the US for use as an adjunctive treatment of partial-onset seizures, is now expected to be launched in March/April 2012, later than prior expectations of a launch in January/February 2012. The Zacks Consensus Estimates for revenue and earnings per share are $3.2 billion and $3.91, respectively.
Moreover, adjusted cash flow from operations is expected to be greater than $1.2 billion, representing an increase of 33% over 2011 levels. However divestitures and generic competition to some of the drugs are expected to weigh upon cash flows by $200 million. The company expects to generate $200 million in cost synergies in 2012 from the various businesses acquired in 2011. In a break from the past, the company refrained from providing specific organic growth guidance for 2012 as it takes the acquisition route to drive profitability.
New Segment Reporting
Following a number of acquisitions made in 2011, Valeant Pharma changed its segment reporting. Though the US Dermatology, US Neurology, and Canada/Australia segments remain as it is, the company has combined its branded generic businesses in Europe and Latin America into one Emerging Markets segment. It will break out the Emerging markets segment into three sub-categories: Emerging Markets-Latin America, Emerging Markets-Central/Eastern Europe and Emerging Markets-South East Asia/South Africa.
Segment Outlook
The US Dermatology segment is expected to post revenues of $900–$950 million in 2012, representing an increase of 60–75% over 2011 levels following closure of the acquisition of Dermik, the dermatology unit of Sanofi (SNY) and Ortho Biologics, a dermatology unit of pharma giant Johnson & Johnson (JNJ). The US Neurology segment is expected to post revenues of $675–$750 million in 2012, down 5–15% over 2011 due to a lingering weak performance of depression drug Wellbutrin and the availability of generics for Diastat. This segment is expected to contribute less than 20% of the total revenue and Wellbutrin is expected to chip in lesser than 4% of that total. The company is expected to generate $350–$375 million in revenue from Canada, up 40–50% over 2011 and $200–$250 million in Australia/New Zealand, an estimated 150% growth over 2011 levels. The emerging markets, the company’s new focus area, are expected to record revenues greater than $1 billion in 2012.
Our Recommendation
We currently have a Neutral long-term recommendation on Valeant Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run.
Valeant Pharma, as it stands today, was formed following the merger of Biovail and Valeant in September 2010. We believe the combined Biovail/Valeant entity is a unique company with a global reach (including exposure to important emerging markets), a diversified revenue base, a favorable tax structure and limited patent exposure. Moreover, accretive acquisitions add to the company’s investment thesis.
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