Valeant lowers 2014 guidance but addresses critics by detailing product growth

MONTREAL – Valeant Pharmaceuticals provided details about the growth of its main products on Thursday, responding to questions raised about its business model by Botox maker Allergan.

Allergan (NYSE:AGN) has defended itself from Valeant’s hostile takeover attempt by accusing the company of using price increases to camouflage weak organic sales increases.

Valeant said its Top 20 global brands, which account for 31 per cent of revenues, grew 22 per cent from last year, with about 45 per cent of the growth coming from volume rather than price increases.

“With 90 per cent or more of the growth coming from volume, we believe that this continued strong performance is especially important and will serve as a model for what we hope to achieve with Allergan,” Valeant CEO Michael Pearson said in a conference call to discuss second-quarter results.

Valeant (TSX:VRX) said Thursday that overall sales of products that have been on the market for at least a year were up four per cent in the second quarter, compared with a year earlier.

However, the Montreal-area company said that if generic drugs were excluded, Valeant’s same-store growth was 10 per cent overall and 15 per cent in the United States.

Valeant said 15 of the top 20 products are growing while three are flat compared to last year. Its Bausch + Lomb consumer eye care operations grew by 12 per cent in the quarter.

The company lowered its guidance for 2014 to reflect the sale of its aesthetics business to Swiss food group Nestle for US$1.4 billion.

It now expects profits excluding one-time adjustments will range between $7.90 and $8.10 per share on revenue of $8 billion to $8.3 billion. That’s down from its April forecast for $8.55 to $8.80 per share and $8.3 billion to $8.7 billion of revenues.

Valeant also introduced guidance for 2015 and 2016 assuming two scenarios: one with acquisitions or alternatively if it uses 90 per cent of free cash flow for debt repayment. Without acquisitions it expects high single-digit organic growth and EPS growth of more than 15 and 20 per cent in the two years respectively.

On the Toronto Stock Exchange, Valeant’s shares fell 7.76 per cent, losing $9.77 at C$116.06 in afternoon trading.

David Maris of BMO Capital Markets said the drop in Valeant shares will make Allergan shareholders less favourable towards a transaction that involves Valeant shares.

“Investors are more likely to take the Allergan trend as a standalone company than the uncertainty of Valeant’s EPS trend as part of a combined company.”

But analyst David Krempa of Morningstar said the second-quarter results were in line with expectations while Valeant’s guidance was better than forecast.

“We believe the results should help settle concerns raised by Allergan management that Valeant’s business was falling apart. The growth legitimizes Valeant’s stance that the recent quarters of low growth were the result of a couple of specific patent losses and not a businesswide issue,” Krempa wrote in a report.

Neil Maruoka of Canaccord Genuity said the selloff of Valeant shares suggests that investors are “myopically focused on near-term guidance” and expected lower revisions to estimates.

“While next year’s guidance might be viewed as disappointing, we would point to the stronger and more balanced long-term organic growth profile as support for a higher valuation for Valeant as a stand-alone business,” Maruoka wrote.

Valeant said it earned $126 million or 37 cents per diluted share in the quarter. That compares with a net profit of $10.8 million, or three cents per share, in the same quarter last year.

Revenues jumped 86 per cent to $2.04 billion, up from $1.095 year-over-year, helped by a strong performance in its U.S. contact lens business and its U.S. Bausch + Lomb business.

Adjusting for one-time items, it earned $651 million, or $1.91 per diluted share, an increase of 43 per cent over the prior year.

Analysts were expecting $1.98 in adjusted earnings per share and 14 cents in net earnings per share on $2.08 billion in revenues, according to estimates compiled by Thomson Reuters.

Meanwhile, Valeant said its target for US$2.7 billion of cost savings will be reduced if Allergan achieves its promised reductions.

Pearson said a combined Valeant and Allergan will deliver almost $20 per share in EPS, compared to between US$7.27 and US$10 in 2016 should Allergan remain independent.

The company said it remains committed to concluding the more than US$50-billion transaction but is working on other deals if the acquisition fails to materialize.

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