Valeant (VRX) Q1 Earnings & Revenues Miss, View Raised

We note that the shares of Valeant have underperformed the Zacks classified Medical-Drugs industry in the last year. The stock lost 12% as compared to the industry’s gain of 5.5%.

The company’s adjusted earnings per share of 78 cents missed the Zacks Consensus Estimate of 96 cents.

However, total revenue came in at $2.10 billion missing the Zacks Consensus Estimate of $2.16 billion and declined 11% from the year-ago quarter. The year-over-year decline was due to lower volumes in the U.S. Diversified Products and Branded Rx segments as a result of the loss of exclusivity for a number of products and challenging market dynamics. Revenues were also negatively affected by foreign currencies, divestitures and discontinuations, and a modest decrease in average realized pricing.

Quarter in Detail

Revenues in the Bausch + Lomb / International segment were $1.15 billion, up 0.3% year over year driven by increases in international volumes, particularly in Europe, the Middle East, South Africa, Asia and Australia which were partially offset by declines in volumes in the U.S.

Average realized pricing across the segment increased mainly from the international business units. However, volume and pricing gains were partially offset by the unfavorable impact of foreign currency and the impact of divestitures and discontinuations.

Revenues in the Branded Rx segment were $604 million, down 9% in the year-ago quarter mainly due to decreased volumes in the dermatology and Salix business units due to the loss of exclusivity of certain product lines, continued generic competition and the impact of an increase in the prevalence of high deductible medical plans.

Nevertheless, pricing improved in the dermatology business, driven by lower customer subsidies and accommodations and higher wholesaler selling prices. The Salix business benefited from higher wholesale selling prices and favorable chargeback. These increases were partially offset by higher managed care rebates particularly in the dermatology business.

Revenues in the U.S. Diversified Products segment were $355 million, a decline of 37% year over year due to a decrease in volume and lower average realized prices which in turn were attributed to loss of exclusivity for products in the segment.

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Research and development expenses were $96 million in the reported quarter, down 6.8% from the year-ago quarter.

Selling, General and Administrative costs were $661 million compared with $813 million in the year-ago quarter.

During the quarter, the company reduced debt by $1.3 billion. On a cumulative basis, the company reduced total debt by $3.6 billion since the end of the first quarter of 2016. Moreover, the company completed more than $1.3 billion in asset sales, including the earlier-than-expected closure of the sale of the CeraVe, AcneFree and AMBI skincare brands.

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 and the FDA granted a PDUFA date of Aug 24. 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.

2017 Guidance

The company continues to expect total revenue in the range of $8.90–$9.10 billion but raised its guidance for adjusted EBITDA by $50 million. The company will close the sale of Dendreon to Sanpower Group for $819.9 million in mid-2017. The company plans to use the proceeds from the divestiture to pay down its high levels of debt.

Our Take

Although first-quarter results missed estimates, the company raised its guidance for EBITDA. After a tumultuous period, Valeant started a rebuilding process with its new CEO, Joseph C. Papa. Even though it is still early to comment on the rebuilding process, but the company’s efforts to sell non-core assets and pay down huge levels of debt is commendable and should bode well in the upcoming quarters. The company still has $28.5 billion of debt as of Mar 31, 2017.

The dermatology business saw some positive trends as the average selling price stabilized. The GI business continues to struggle with weak sales of Xifaxan. However, the drug should see gain in market share with an increased sales force.

Zacks Rank & Key Picks

Valeant currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the health care sector are Infinity Pharmaceuticals, Inc. (NASDAQ:INFI) , Galena Biopharma, Inc. (NASDAQ:GALE) and BioTime, Inc. (NYSE:BTX) . While Galena sports a Zacks Rank #1 (Strong Buy), BioTime and Infinity carry a Zacks Rank #2 (Buy). You can see .

Infinity’s loss per share estimates narrowed from $1.43 to $1.03 and from $1.75 to $1.52 for 2017 and 2018, respectively over the last 60 days. The company posted positive earnings surprises in three of the four trailing quarters, with an average beat of 36.64%.

Galena’s loss per share estimates narrowed from $2.03 to 58 cents for 2017 over the last 60 days. The company posted positive earnings surprises in two of the four trailing quarters, with an average beat of 53.83%.

BioTime’s loss per share estimates narrowed 60.9% to 18 cents for 2017 over the last 60 days. The company posted a positive earnings surprise in two of the four trailing quarters with an average beat of 12.32%.

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Written By: Zacks Investment Research