2Q EARNINGS: Valeant dives on lower guidance; Allergan deal value takes a hit
This article was originally published in Scrip
Valeant Pharmaceuticals closed down 6.7% at $117.39 per share on 31 July after the Canadian specialty pharma company lowered its full-year 2014 revenue and earnings guidance despite an 86% year-over-year increase in second quarter sales to $2bn and a 43% jump in adjusted income to $651m or $1.91 per share.
Laval, Quebec-based Valeant's second quarter performance included 4% organic growth for products other than those acquired in last year's $8.7bn Bausch & Lomb purchase; organic growth for the Bausch & Lomb assets was 12%. But regardless of the high double-digit revenue and earnings increases, the company's second quarter earnings conference call with analysts and investors – as expected – focused largely on Valeant's ongoing effort to acquire competitor Allergan.
The prospective deal was valued as high as $54bn previously, but Valeant's stock is now trading well below the 1 May peak of $138.13, which was reached after its Pershing Square Capital-led Allergan purchase attempt became public knowledge in late April (scripintelligence.com, 23 April 2014).
Allergan's stock closed down 3.7% at $165.86 on 31 July after Valeant's second quarter earnings report, which was just $8.63 below Allergan's one-year stock price high. Valeant is down $35.71 from its 52-week peak.
In pursuit of Allergan
Valeant's declining share price drops its highest bid for Allergan – $72 in cash plus 0.83 Valeant shares per outstanding Allergan share – to $50.4bn (scripintelligence.com, 30 May 2014). The $3.6bn erosion of the potential merger's value may test the willingness of Allergan stock owners to authorize a special meeting. The shareholders will be asked during that meeting to force negotiations between Allergan and Valeant and vote for a new Pershing Square-nominated board of directors (scripintelligence.com, 18 July 2014).
Pershing Square, Allergan's biggest shareholder and Valeant's co-conspirator in its quest to buy the Botox and Restasis maker, needs shareholders owning at least 25% of Allergan's stock to authorize the special meeting. Allergan has up to 120 days to authorize the meeting once the appropriate ratio of shareholder proxies have been collected.
"We remain very committed to getting this deal done as we believe that this combination will create an unrivaled platform for growth and value creation," Valeant executive vice president and chief financial officer Howard Schiller said during the company's second quarter earnings conference call.
Allergan initially derided Valeant's plan to add value by slashing research and development costs after finalizing an acquisition, but Allergan reversed its stance and said during its second quarter earnings report that the Irvine, California-based company would cut 1,500 jobs in an effort to appease investor concerns about corporate costs (scripintelligence.com, 22 July 2014).
Similarly, Valeant has changed its language regarding the future of Allergan's headcount under Valeant's structure.
"A number of our key initiatives would include keeping the global aesthetics team for Allergan largely intact and keeping the dry eye and glaucoma commercial team largely intact. [We would be] retaining the neurology and urology teams from Allergan and thoughtfully integrating the dermatology teams to minimize the disruption to customers," Valeant chairman and CEO Michael Pearson said during the company's second quarter call.
"We also want to retain key R&D people for the high value-added R&D programs, and we will primarily focus on achieving our synergies through expense reduction and non-customer-facing personnel, specifically targeting corporate global functions and regional functions," Mr Pearson said.
Valeant forecasts that its revenue will double in 2015 to $16.6bn if its acquisition of Allergan closes by the end of 2014. Revenue would increase another 9% to $18bn in 2016. Valeant's model assumes high single-digit annual growth for Allergan's portfolio versus the double-digit growth envisioned by Allergan.
Guidance lowered without Allergan
But Valeant doesn't own Allergan yet and seems no closer to buying the aesthetic, neurological and ophthalmologic drug company, given Allergan's continued resistance to do a deal.
As a standalone entity, Valeant lowered its full-year 2014 revenue guidance to a range of $8bn to $8.3bn versus the company's April forecast of $8.3bn to $8.7bn. Non-GAAP earnings per share (EPS) has been reduced to $7.90 to $8.10 from a prior range of $8.55 to $8.80.
Mr Schiller explained that Valeant had to lower investor expectations for the year based on its plans to hire more sales representatives and invest in direct-to-consumer advertising for certain new products.
The increased sales and marketing expenditures will take advantage of better-than-expected doctor and patient uptake for three recently launched products: Luzu (luliconazole) 1% cream for athlete's foot, jock itch and ringworm; Jublia (efinaconazole 10% topical solution) for toenail fungus (scripintelligence.com, 9 June 2014); and Bausch & Lomb's Ultra contact lens.
Valeant's lower 2014 guidance also has to do with the loss of revenue from products divested to make way for overlapping assets in the Allergan and PreCision Dermatology portfolios. Valeant bought PreCision for $475m up front earlier this year (scripintelligence.com, 4 February 2014). And in May with its eyes on Allergan, Valeant sold five dermatology assets – three dermal fillers and two injectable wrinkle-reducing medicines – to Nestle for $1.4bn (scripintelligence.com, 28 May 2014).
Despite Valeant's reduced guidance, however, the company expects sales to increase from 4% organic growth in the second quarter to high single-digit growth in the second half of this year. Third quarter sales are forecast to be $1.9bn to $2.1bn and fourth quarter sales are projected to reach $2.1bn to $2.3bn.
Some key second quarter numbers:
Budget line item | Second quarter 2014 | Second quarter 2013 |
Total revenues | $2bn (+86% year-over-year) | $1.1bn |
US revenue | $1bn (+60%) | $650.4m |
Ex-US revenue (developed world) | $441.6m (+196%) | $149.4m |
Emerging markets revenue | $561.4m (+90%) | $295.6m |
Non-GAAP income | $650.6m | $420.5m |
Non-GAAP earnings per share (EPS) | $1.91 | $1.34 |