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An Investor's View of Valeant Pharmaceuticals for 2017

PART:
1 2 3 4 5 6
Part 5
An Investor's View of Valeant Pharmaceuticals for 2017 PART 5 OF 6

VRX’s US Diversified Products Segment Could See Falling Revenues in 2017

US Diversified Products segment

On August 9, 2016, Valeant Pharmaceuticals (VRX) announced a new organizational structure. According to this structure, revenues earned through the sales of pharmaceutical products, medical devices, and over-the-counter (or OTC) products in the US belonging to neurology, aesthetics, and other such therapeutics products are recorded under the US Diversified Products segment.

Further, revenues earned from the sale of generic drugs offered by Valeant Pharmaceuticals in the US are also recorded under the US Diversified Products segment. Valeant Pharmaceuticals (VRX) competes with other generic pharmaceutical players such as Teva Pharmaceutical (TEVA), Mylan (MYL), and Perrigo (PRGO).

VRX&#8217;s US Diversified Products Segment Could See Falling Revenues in 2017

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Revenue trends

The above table shows that in 3Q16, there was a significant decline in total revenues earned by the US Diversified Products segment on a year-over-year (or YoY) basis. Neurology products have witnessed a gradual decline in both volumes sold as well as net selling prices. The reduced volumes can be attributed to increasing generic competition for neurology drugs such as Xenazine, Edecrin, and Ammonul.

Selling prices have also been affected as Valeant Pharmaceuticals had to offer higher rebates to both group purchasing organizations as well as managed care organizations for Nitropress and Isuprel. This effect has been significant in 2016, as Valeant Pharmaceuticals has changed its distribution model. Its distribution model was originally focused on specialty pharmacy products, which enabled the company to command premium pricing.

If these negative revenue trends continue in future quarters, there may be an adverse impact on Valeant Pharmaceuticals stock and the VanEck Vectors Pharmaceutical ETF (PPH). Valeant Pharmaceuticals makes up ~1.2% of PPH’s total portfolio holdings.

Projections for 2017

In its 3Q16 earnings release, Valeant Pharmaceuticals (VRX) projected that its revenues and EBITDA1 in 2017 could be lower than expected for 2016. This is attributable to impending patent expiration of Nitropress, Isuprel, Syprine, Mephyton, and virozole.

The impact of generic competition for Edecrin, which lost its exclusivity in 2Q16, and Ammonul, which went off-patent in March 2016, is also expected to drag down Valeant Pharmaceuticals’s 2017 financial performance.

In the final article in this series, we’ll explain why Valeant Pharmaceuticals has updated its 2016 earnings per share (or EPS) guidance.

  1. earnings before interest, tax, depreciation, and amortization
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