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An Investor's View of Valeant Pharmaceuticals for 2017

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An Investor's View of Valeant Pharmaceuticals for 2017 PART 1 OF 6

Valeant Pharmaceuticals Could See Modest Revenue Decline in 2016

Declining revenue trends

In 3Q16, Valeant Pharmaceuticals (VRX) revised its fiscal 2016 revenue guidance downward from the range of $9.9 billion–$10.1 billion to the range of ~$9.6 billion to ~$9.7 billion. The company also reduced its estimate for adjusted non-GAAP1 earnings per share (or EPS) from $6.60–$7.00 to $5.30–$5.50.

Finally, Valeant Pharmaceuticals also updated guidance for adjusted non-GAAP EBITDA2 from its previously projected ~$4.8 billion to ~$5.0 billion to ~$4.3 billion to ~$4.4 billion.

Valeant Pharmaceuticals Could See Modest Revenue Decline in 2016

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Valeant Pharmaceuticals has attributed this drop in guidance to its ongoing transformation and turnaround efforts, which could result in a negative short-term impact on revenues and profit margins.

Valeant Pharmaceuticals has not included the impact of unexpected foreign exchange fluctuations or the devaluation of the Egyptian pound while calculating these estimates. If these changes adversely affect Valeant Pharmaceutical’s financial projections, it may have a negative impact on the company’s stock.

These changes are also expected to affect the VanEck Vectors Pharmaceutical ETF (PPH). Valeant Pharmaceuticals makes up ~1.2% of PPH’s total portfolio holdings.

Wall Street analysts have projected that in 2016, Valeant Pharmaceutical’s revenues could fall year-over-year (or YoY) ~8.6% and reach ~$9.6 billion. These projections are in line with the guidance provided by the company for fiscal 2016.

For fiscal 2016, VRX’s peers Regeneron (REGN), United Therapeutics (UTHR), and Biogen (BIIB) are expected to earn revenues of ~$4.9 billion, $1.6 billion, and $11.5 billion, respectively.

Multiple challenges

In its 3Q16 earnings transcript, Valeant Pharmaceuticals (VRX) announced that the Prescription Drug User Fee Act date for its investigational psoriasis drug, brodalumab, has been delayed by three months from November 16, 2016, to February 16, 2017.

The company is also facing some operational and quality control problems. After inspections in February 2016 and September 2016, the FDA issued a warning letter to the company related to its manufacturing operations in Rochester, New York. Although this has not affected the production or sales of Valeant Pharmaceuticals’s Bausch & Lomb lenses, it may become a regulatory challenge going forward. Valeant Pharmaceuticals is also witnessing product recalls in its Consumer segment and has to fill a high backlog in its Dental segment.

Increasing generic competition for three key products—Ofloxin Otic, Zegerid, and Ziana—also poses significant risk to the company’s profitability.

In 2016, Valeant Pharmaceuticals (VRX) suffered from talent retention issues, negative press coverage, and litigation. These problems are expected to affect Valeant Pharmaceutical’s profit margins in future quarters.

In the next article, we’ll discuss revenue trends for Valeant Pharmaceuticals’s Bausch & Lomb/International segment in 2016.

  1. generally accepted accounting principles
  2. earnings before interest, tax, depreciation, and amortization
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