PDF Valeant (VRX-NYSE)- Analyst Note

[Pages:7]February 24, 2015

Valeant Pharmaceuticals

Current Recommendation

Prior Recommendation Date of Last Change

OUTPERFORM

Underperform 11/02/2014

Current Price (02/23/15) Target Price

$198.75 $238.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

$198.75 $106.73

36.38 0.83

2,679,480

336 $66,780

3.62 N/A

9

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

$0.00 0.00

64.5 51.9 N/A

P/E using TTM EPS

23.8

P/E using 2015 Estimate

32.7

P/E using 2016 Estimate

26.2

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

2 Buy

? 2015 Zacks Investment Research, All Rights reserved.

(VRX-NYSE)- Analyst Note

SUMMARY

Valeant Pharmaceuticals International reported fourth-quarter 2014 cash earnings per share of $2.58 up from the year-ago figure of $2.15 per share. Revenues for the quarter soared 10.5% year over year to $2.3 billion and exceeded the Zacks Consensus Estimate of $2.2 billion. Valeant has been quite aggressive on the acquisition front in the last two years, which contributed to solid growth. Dermatology is the focal point for Valeant but the company is set to broaden its product portfolio. The results were overshadowed by the Salix Pharma deal. After a failed bid in 2014 to acquire Allergan, Valeant has now zeroed on Salix Pharma. The company aims to further diversify its specialty product portfolio with the Salix acquisition We maintain our Outperform recommendation.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Average

Large-Growth Med-Drugs

68 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

1,068 A 1,886 A 2,091 E

1,096 A 2,041 A 2,271 E

Q3 (Sep)

1,542 A 2,056 A 2,351 E

Q4 (Dec)

2,064 A 2,280 A 2,512 E

Year (Dec)

5,770 A 8,264 A 9,259 E 9,878 E

Earnings per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013

$1.30 A

$1.26 A

$1.41 A

$2.15 A

$6.19 A

2014

$1.74 A

$1.93 A

$1.95 A

$2.58 A

$8.34 A

2015

$1.31 E

$1.48 E

$1.50 E

$1.77 E

$6.07 E

2016

$7.59 E

Projected EPS Growth - Next 5 Years %

N/A



10 S. Riverside Plaza, Chicago IL 60606

RECENT NEWS

Valeant Pharmaceuticals Earnings Eclipsed by the Salix Deal Feb 23, 2015

Valeant Pharmaceuticals International reported fourth-quarter 2014 cash earnings per share of $2.58 (excluding special items and non-cash expenses), up from the year-ago figure of $2.15 per share.

Excluding stock-based compensation expense, earnings per share came in at $2.57. The Zacks Consensus Estimate for fourth-quarter earnings were $1.29.

Revenues for the quarter soared 10.5% year over year to $2.3 billion. Revenues exceeded the Zacks Consensus Estimate of $2.2 billion.

Quarterly Highlights

Product sales at Valeant amounted to $2.2 billion during the fourth quarter, up 10% year over year. Overall, same-store sales organic growth was 16%. Organic growth from Bausch+Lomb came in at 8%.

Research & development expenses were relatively flat year over year at $59.1 million, while selling, general & development expenses increased 16.5% to $524.5 million.

2014 Results

Total revenue came in at $8.3 billion in 2014, up 43.2% from 2013, in line with the Zacks Consensus Estimate. Cash earnings per share came in at $8.34, up from $6.24 per share in 2013.

Salix Pharmaceuticals Acquisition

Concurrent with the fourth-quarter results, Valeant announced that it will acquire Salix Pharmaceuticals for $158.00 per share in cash or a total enterprise value of approximately $14.5 billion. Salix is a leader in gastrointestinal market (GI) with a wide variety of drugs such as Xifaxan 550 (reducing the risk of recurrence of overt hepatic encephalopathy in adults), Uceris (control mild or moderate ulcerative colitis), Relistor (opioid-induced constipation), and Apriso (ulcerative colitis).

The acquisition is expected to yield more than $500 million in annual cost savings. The synergies will be realized within six months of closure of the acquisition, primarily from reductions in corporate overhead and R&D rationalization expenses.

Salix has been plagued with inventory issues for some time now, which affected the company s thirdquarter results adversely. The CEO of the company stepped down last month owing to these issues. Consequently, Valeant expects to work down wholesale inventory and plans to target two months or less of wholesale inventory by 2015-end. Net impact of excess inventory on 2015 revenues is expected to be above $500 million.

The transaction is expected to close in the second quarter of 2015.

VALUATION

Valeant reported fourth-quarter 2014 cash earnings per share of $2.58 up from the year-ago figure of $2.15 per share. Revenues for the quarter soared 10.5% year over year to $2.3 billion and exceeded the Zacks Consensus Estimate of $2.2 billion.

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The company has been quite aggressive on the acquisition front in the last two years, which contributed to solid growth. Dermatology is the focal point for Valeant but the company is set to broaden its product portfolio. We note that Valeant had acquired Bausch+Lomb in Aug 2013 in order to strengthen its ophthalmology business, which had been a miniscule portion of Valeant s overall portfolio. After a failed bid in 2014 to acquire Allergan, Valeant has now zeroed on Salix Pharma. The company aims to further diversify its specialty product portfolio with the Salix acquisition as the GI market looks attractive at this juncture.

Valeant s current trailing 12-month earnings multiple is 23.8, compared to the S&P 500 average of 18.4x. Over the last five years, Valeant s shares have traded in a range of 8.5x to 50.1x trailing 12-month earnings. The stock is currently trading at a 2015 multiple of 32.7x compared to S&P 500 average of 16.8. We maintain our Outperform recommendation given the strong performance and set a price target of $238, which is based on 39.2x our 2015 EPS estimate.

Key Indicators

Valeant Pharma (VRX)

P/E F1

32.7

P/E F2

26.2

Est. 5-Yr EPS Gr%

20.7

P/CF (TTM)

16.1

P/E (TTM)

23.8

P/E 5-Yr

High (TTM)

50.1

P/E 5-Yr Low (TTM)

8.5

Industry Average S&P 500

210.1 28.9 16.8 15.7

14.0 27.0 157.7 151.0 31.3

10.7

15.3

18.4

19.4

12.0

Merck KGaA (MKGAF)

16.0 13.2

2.8

12.8

15.5

10.6

Takeda Pharmaceuticals (TKPYY)

48.9 40.1

7.4

13.1

58.3

57.0

14.4

Shire Plc ADR (SHPG)

21.3 18.4

10.6

25.0

22.7

27.2

14.0

Eisai Co Ltd (ESALY)

50.2 66.9

5.2

19.9

31.5

41.7

10.2

TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow

Valeant Pharma (VRX)

Industry Average S&P 500

P/B Last Qtr.

10.3

8.2 5.3

P/B 5-Yr High

10.3

8.2 9.8

P/B 5-Yr Low

0.7

8.2 3.2

ROE (TTM)

50.4

-93.1 25.5

D/E Last Qtr.

3.0

0.1

Div Yield Last Qtr.

0.0

0.0 2.1

EV/EBITDA (TTM)

49.8

-0.8

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of ABT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1095 companies covered: Outperform - 15.4%, Neutral - 79.1%, Underperform 5.0%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

NOTE: THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.

OVERVIEW

Based in Laval, Canada, Valeant Pharmaceuticals International is a specialty pharmaceutical and medical device company.

The company develops, manufactures and markets a wide array of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products primarily along with medical devices such as contact lenses, intraocular lenses, ophthalmic surgical equipment, and aesthetics devices.

The company is heavily reliant on acquisitions for growth and reports operations through two business segments Developed Markets and Emerging Markets.

Valeant primarily caters to eye health, dermatology and neurology in developed markets. The Developed Markets segment includes sales of pharmaceutical products in the U.S, OTC products, and medical device products, as well as alliance and contract service revenues, in the areas of eye health, dermatology and podiatry, aesthetics, and dentistry along with pharmaceutical products, OTC products, and medical device products sold in Canada, Australia, New Zealand, Western Europe and Japan. The principal products include Solodyn, Wellbutrin XL, Xenazine, Zovirax, Lotemax, Arestin, etc.

The focus in emerging markets is mainly on branded generic pharmaceutical products and branded pharmaceuticals, OTC products and medical device products. These products are primarily sold in Central and Eastern Europe (primarily Poland and Russia), Asia, Latin America (Mexico, Brazil, and Argentina), Africa and the Middle East.

Valeant generated sales of $5.8 billion in 2013, up 65.6% from a year ago.

REASONS TO BUY

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Upgrade Recommendation to Outperform: Valeant s third-quarter results and the subsequent increase in guidance were encouraging. Based on strong third-quarter results, the company increased its earnings guidance for fourth-quarter 2014 by $0.10 to the band of $2.45 $2.55. Valeant has increased its 2014 guidance as well. Revenues are now projected in the range of $8.1 $8.3 billion, up from the earlier projection of $8.0 $8.1 billion. Earnings per share, on a cash basis, are now projected in the range of $8.22 $8.32, compared to the earlier projection in the range of $7.90 $8.10 per share. Estimates have gone up since the company reported third-quarter results and hence we upgrade our recommendation to Outperform.

Acquisitions Driving Growth: Valeant has been quite aggressive on the acquisition front in the last two years, which has contributed to its solid growth. Dermatology is the key focus area for the company and it continues to strengthen its dermatology portfolio through strategic acquisitions. Key among them includes :

o In Dec 2012, Valeant had acquired Medicis Pharmaceutical Corporation for approximately $2.6 billion. The erstwhile Medicis had been focused on the development and marketing of products for the treatment of dermatological and aesthetic conditions in the U.S. Valeant had achieved over $300 million of cost synergies from the acquisition on a run rate basis as of Dec 31, 2013.

o In Apr 2013, Valeant had acquired Obagi Medical Products for $440 million. Obagi develops markets and sells products, which prevent or improve the most common and visible skin disorders. The products include leading dermatology brands such as Obagi Nu-Derm, Condition & Enhance, Obagi-C Rx, ElastiDerm and ClenziDerm.

o In Jan 2014, Valeant had acquired Solta Medical which designs, develops, manufactures and markets energy-based medical device systems for aesthetic applications.

o Meanwhile, if the proposed acquisition of Allergan goes through, it will immensely boost Valeant s dermatology portfolio. Allergan, a global multi-specialty pharmaceutical company, develops and commercializes innovative products for eye care, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological and other specialty markets. Allergan s key product, Botox, is approved for a number of indications. Allergan has declined the offer quite a few times in the last three months forcing Valeant to launch a hostile bid. Valeant completed the sale of all rights to Restylane, Perlane, Emervel, Sculptra, and Dysport owned or held by the company for $1.4 billion, thereby clearing a major FTC hurdle towards achieving regulatory approval for Allergan.

Creating an ophthalmology Franchise: Apart from dermatology, Valeant is trying to build its ophthalmology franchise. Valeant had acquired eye-care company, Bausch + Lomb Holdings, in Aug 2013 to strengthen its then minuscule ophthalmology portfolio. With a history of 160 years, Bausch + Lomb currently has recognized prescription and OTC brands such as Besivance, Lotemax, Ocuvite and PreserVision; and vision-care brands such as Biotrue ONEday, PureVision, renu and Boston. The company also has surgical brands such as enVista, Storz, Stellaris and VICTUS under its extensive portfolio. Valeant has substantially integrated the operations of B&L business into its decentralized structure to realize operational efficiencies and cost synergies. Valeant expects to achieve $850 million of cost synergies on an annual run rate basis by 2014 end.

Focus on Emerging Markets: Valeant is keen to develop its footprint in emerging markets. The company acquired South Africa based Protea in Jul 2014 which deals in OTC product primarily related to women s health. Valeant has also made small tuck in acquisitions in Indonesia (Satu), Asia (Bescon) and Middle East (MedPharma) to expand its geographical presence.

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RISKS

Generic Competition: Valeant is facing generic competition for some of its drugs like Cesamet, BenzaClin, Cardizem CD and Wellbutrin XL (both in the U.S. and Canada). In Apr 2013, Mylan launched a generic version of Zovirax ointment. In addition, generic versions of Retin-A Micro and Vanos were launched in Aug 2013 and Jan 2014, respectively. The entry of generic competitors for some of its key drugs would adversely impact the top line, requiring us to revise our recommendation.

Heavily Dependent on Acquisitions: Valeant heavily relies on acquisitions for growth, thereby focusing less on organic growth. Integration risks pose a great challenge to the company. Valeant had faced significant challenges while integrating its Medicis acquisition (in Dec 2012). The Medicis business was weak in 2013 due to sales force disruption from integration and significant channel inventories. We remain concerned about the organic growth aspect of the company as it might not be able to realize the targeted synergies from the acquisitions, thereby impacting both the top and bottom line.

Analyst Content Editor Copy Editor Last Updated by Lead Analyst QCA Reason for Update

Ekta Bagri Ekta Bagri Sayantani Sinharoy Ekta Bagri Ekta Bagri Arpita DuttNote 4Q14 Earnings

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