Valeant Pharma Beats on Revenues - Analyst Blog

Valeant Pharmaceuticals International‘s (VRX) first quarter 2011 earnings of 49 cents per share (excluding special items but including stock-based compensation expense) missed the Zacks Consensus Estimate by 2 cents and the year-ago earnings by 10 cents per share.

Revenues for the quarter increased to $565 million, well above the Zacks Consensus Estimate of $517 million and the prior-year quarter’s revenue of $219.6 million. However, revenue included a one-time alliance and royalty revenue of $36 million related to the March 2011 out-licensing of product rights to Cloderm cream, a mid-potency steroid to Dr. Reddy's Laboratories (RDY). Excluding the one-time payment, revenue was $529 million, which was still above both the Zacks Consensus Estimate and the prior-year revenue. Organically (excluding the impact of one-time revenues, acquisitions and foreign exchange), revenues grew 7% over the year-ago quarter.

The improvement in revenues was primarily due to the September 2010 merger of Valeant Pharma with Biovail Corporation. Results for the first quarter of 2010 only reflect legacy Biovail revenues and do not include any revenues from legacy Valeant.

In spite of increased revenues, earnings saw a year-over-year decline in the first quarter owing to a higher number of shares outstanding.

Quarterly Highlights

Product sales amounted to $500.4 million during the reported quarter, compared with $212.0 million in the prior-year quarter. The increase in revenues was due to robust growth in all segments (specialty pharmaceuticals as well as branded generics) except for the US Neurology and Other, which was affected by the availability of generics for Diastat.

In the reported quarter, Wellbutrin, a drug for depression, delivered a growth of 2% over the prior-year period. Zovirax, available as cream and ointment for herpes, also posted a growth of 38%. Recently, Valeant acquired the US rights for all formulations of Zovirax fromGlaxoSmithKline (GSK) and hopes to acquire the Canadian rights soon. Prior to this agreement, Glaxo used to supply Zovirax to Biovail for marketing and distribution solely in the US.

Research & development (R&D) expenses amounted to $13.7 million, reflecting a year-over-year increase of 8.7%. Selling, general & administrative (SG&A) expenses for the first quarter increased 221.0% to $139.5 million. Increase in the number of pipeline and marketed products, following the merger, led to the rise in operating expenses.

Valeant Pharma was successful in achieving cost synergies of $75 million in the reported quarter compared with $53 million achieved in the prior quarter.

Outlook

Following the release of first quarter results, Valeant Pharma upped its guidance for 2011. The company expects earnings to come in the range of $2.65 – $2.90 per share for 2011, revised from the previous guidance range of $2.45 – $2.70 per share. Revenue is expected to be greater than $2.4 billion in 2011. The Zacks Consensus Estimate of revenue is in line with the company expectations.

Additionally, the company expects to experience organic growth of at least 8% through 2011.

Valeant Pharma estimates that the combined company will generate $350 million in cost synergies in 2011, higher than its expectation in the last quarter and significantly better than the $175 million in synergies originally expected when the merger was first announced.

Pipeline Update

In March 2011, Valeant and partner Glaxo announced receipt of marketing authorization for the use of ezogabine (to be sold as Trobalt in the European Union) as an add-on treatment of partial onset seizures, in patients with epilepsy. The company launched the product in the EU starting with Germany. Valeant Pharma expects to launch Trobalt in UK, Denmark and Switzerland later in May 2011.

In the US, in mid April 2011, Glaxo and Valeant submitted a response to the complete response letter (CRL) issued by the US Food and Drug Administration (FDA) for the new drug application (NDA) for ezogabine. The CRL was received in December 2010, and was for non-clinical reasons. The FDA will give its decision on June 15, 2011.

Our Recommendation

We have a Neutral recommendation on Valeant Pharmaceuticals. Our long-term stance is supported by a Zacks #3 Rank (Hold rating) carried by the company in the short run.

Valeant Pharmaceuticals had expressed an interest in acquiring the Cephalon (CEPH) and had initially approached Cephalon in late March with a $73 bid. However, Cephalon rejected the offer and subsequently entered into a definitive agreement to be acquired by Teva Pharmaceutical Industries Ltd. (TEVA).

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. The combined entity is expanding its global presence through accretive acquisitions. However, the failure to acquire Cephalon disappointed us. We therefore prefer to remain on the sidelines.

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