Valeant Sees Sunshine On Cloudy Day, But Dermatology Recovery Just Starting

The Bausch & Lomb and Salix units are gaining sales momentum, execs said, while debt-reduction efforts remain ahead of schedule. They offered no excuses for a declining dermatology franchise, however.

Valeant Pharmaceuticals International Inc. executives strived to accentuate the positive during a second quarter earnings call Aug. 8 and investors didn't completely reject the argument, as the troubled company's stock closed the trading day up nearly 2%. However, to buy into the good news, one must accept Valeant's assurances that it can turn around a struggling dermatology franchise and that ahead-of-schedule debt reduction efforts will enable it to regain overall footing before a heavy debt crunch in 2020-21.

CEO Joseph Papa characterized Valeant's path to recovery from a mountain of debt, legal troubles and patent expirations as one in which stabilization occurred last year and recovery is underway this year and next. (Also see "Debt-laden Valeant Sells Its Assets, More Divestments Likely" - Scrip, 10 Jan, 2017.) Much of the firm's argument was that revenues for its eye care and gastrointestinal businesses are on the rise – if one discounts the impact of foreign exchange and debt-reducing divestitures, he and Chief Financial Officer Paul Herendeen explained.

"We have a journey ahead of us to be clear," Papa told the same-day conference call. "It's going to be a multi-year process to transform this company, but I am very pleased with the progress that our team has made so far. We completed the stabilization phase in year one, and we are now on the early part of a two-year turnaround phase, where our focus is on strengthening our balance sheet, maintaining leadership positions in specialty-driven markets and those markets with above-average growth rates, and allocating resources efficiently."

"We have a journey ahead of us to be clear. It's going to be a multi-year process to transform this company." – Valeant CEO Joseph Papa

For the quarter, Valeant reported revenues of $2.33bn and a net loss of $38m compared to the second quarter of 2016. However, the Bausch & Lomb Inc. (B&L) ophthalmology and Salix Pharmaceuticals Ltd. GI units delivered what Valeant is calling "strong organic growth," which Herendeen defined as adjusting reported revenue to negate the impact of foreign exchange rates over 12 months and the loss of revenue from divested assets. In that light, the two units, which together accounted for 73% of the company's quarterly revenue, were up 6% and 16%, respectively, year-over-year.

Salix's 16% organic growth exceeds the unit's 13% overall growth during second-quarter 2017, Valeant stated, while B&L was down 3% overall but up 6% organically. Leading the way for the GI business was the irritable bowel syndrome stalwart Xifaxan (rifaximin) – with 16% sales growth and improving prescriptions trends, up 6% sequentially and 2% year-over-year. B&L was bolstered by 4% growth in China, or 9% on an organic basis. Papa said B&L currently accounts for 56% of Valeant's total revenue.

Bolus Of LOEs Present Another Business Challenge

Another headwind for Valeant has been exclusivity losses across its various business segments, Herendeen noted. Combined with revenue lost to divested business units and products, Valeant projects it will lose a net $675m in revenue this year, including anticipated patent expiries in its ophthalmology (Lotemax (loteprednol etabonate), Istalol (timolol maleate)) and branded Rx (Mephyton (phytoniadone), Syprine (trientine), Isuprel (isoproterenol)) segments.

"The bolus of LOEs hitting the company in the 2016 and 2017 timeframe is quite large and creates a growth drag that we cannot overcome," he said. "The decline in the LOE products reduced revenue by some $110m and pre-tax profits by roughly $100m in the quarter compared with Q2 of 2016."

Sales growth for B&L derived 2% from price increases and 4% from volume growth, Herendeen said. International business drove the growth, increasing 17%, with emerging markets such as Russia, China, Mexico, the Middle East and certain African countries leading the way.

One setback for ophthalmology was a second complete response letter regarding Valeant's NDA for Vyzulta (latanoprostene bunod), a single-agent eye drop for open-angle glaucoma or ocular hypertension. Valeant disclosed the CRL – the second for this candidate – on Aug. 8 and said that like the first, it was related to FDA concerns about manufacturing processes at a plant in Tampa. (Also see "Keeping Track: Approval Elusive For Biosimilar Neulasta; Valeant Gets A Nod And A No From FDA; Submissions From Amgen, Puma, Bristol" - Pink Sheet, 22 Jul, 2016.) Papa called the letter disappointing news and said Valeant will work with FDA to resolve the manufacturing issues.

Branded prescription product business decreased 3% overall and basically was flat on an organic basis, he added. But Salix provided reason for optimism, thanks largely to increased demand for Xifaxan, the exec noted. Overall Salix sales volume increased 350 basis points, with investments in a new primary care sales team bringing results, he said.

"We enjoyed improved net pricing in the Salix business as result of modest price increases across the GI portfolio as well as favorable gross-to-net items compared with the prior year quarter. While the improved net pricing is awesome, I just caution that part of that improvement is less durable than the rest," Herendeen cautioned. But he was less reticent about Xifaxan's growth prospects.

"In Q2 compared with Q2 last year, total prescriptions for Xifaxan were up 2%," he noted. "After we lost some momentum with Xifaxan in late 2016 and into Q1 of 2017, it's encouraging to have our most recent results showing a return to growth." Elsewhere in the GI portfolio, Apriso (mesalamine) prescriptions increased 7% while Relistor (methylnaltrexone bromide) scripts shot up 33% year-over-year.

Dermatology Drops 31% Over 12 Months

Herendeen made no effort, however, to paint a bright picture of the dermatology franchise, noting that filled prescriptions declined during the second quarter from what had been a soft first quarter. Overall, dermatology revenue tumbled 31% from the second quarter of 2016.

"The dynamics of the dermatology segment have been changing over the last several years with payers more aggressively restricting access to branded products" he explained. "Layer on top of that the challenges we face in converting from a specialty pharmacy-based model in early 2016, and we simply have not been able to deliver to our own or likely to your expectations. We take full responsibility for that."

To address those issues, Herendeen pointed out that the dermatology sales force had been "right-sized" from a headcount of 250 to 151, while the company invested in sales support systems and market access. The goal is to bring dermatology back to a growth trajectory via improved execution with its existing product portfolio and the successful launch of new products. Later during the call, Papa said he anticipates that recently launched Siliq (brodalumab) will be a "new growth driver" for this business, although analysts have questioned the sales potential of the IL-17 blocker for psoriasis. (Also see "Siliq Probably Isn't The Light At The End Of Valeant's Tunnel" - Scrip, 28 Feb, 2017.)

Asserting that the dermatology business is stabilizing, Papa also said he's gotten positive feedback from clinicians about the therapeutic utility of Siliq, which was priced lower than competing psoriasis drugs. (Also see "Valeant Gives Siliq Competitive Price In Crowded Psoriasis Market" - Scrip, 21 Apr, 2017.) "I spent some time with key opinion new leaders at a product launch of that last week, and I was strongly encouraged by their enthusiasm for Siliq's unique method of action and strong efficacy," he said. "We are leveraging these key opinion leaders to educate and activate patients who can benefit from the pharmacologic properties of an IL-17 blocker."

Papa reiterated Valeant's intention to reduce its debt, noting that 10 of 12 announced divestitures over the past year have closed, while the more recent sales of iNova Pharmaceuticals Pty. Ltd. and Obagi Medical Products Inc. are expected to close before the end of 2017. (Also see "Deal Watch: Valeant Continues Divestment Spree By Selling Obagi At A Loss" - Scrip, 25 Jul, 2017.) As of Aug. 15, Valeant will have reduced its debt by $4.8bn, putting it ahead of schedule to cut $5bn in debt as of February 2018, the exec noted. (Also see "Valeant On Track With Debt-Reduction Goals, But Will It Be Enough?" - Scrip, 9 May, 2017.) Herendeen said the efforts to date give Valeant near-term flexibility to grow its business as it now will not face significant debt maturities until 2020-21.

Valeant closed trading Aug. 8 up 2% to $15.63 per share, continuing a recent trend of price appreciation. Analysts, not surprisingly, gave Valeant mixed grades for the second quarter, including Douglas Tsao of Barclay's, who lauded the company's debt-reduction progress so far. He maintained an "equal weight/positive" rating for the stock in an Aug. 8 note.

"Valeant's ability to buy time has clearly likely been the biggest driver of recent share strength; to drive meaningful upside, we believe the next leg of the story has to be around driving underlying business performance/sustainability," he said.

Timothy Chiang of BTIG Equity Research said some of the underlying business trends already are pointing in the right direction., "It appears that volume trends for a number of the GI products have improved in 2Q17 versus 1Q17, including Xifaxan, Apriso and Relistor," Chiang said in an Aug. 7 note previewing the earnings call. "With Xifaxan, total prescriptions were up about 6%, sequentially, with year-over-year growth essentially flat in Q2."