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Yes, There Will Be Margin Erosion for Valeant in 2017

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Understanding the segmental contribution to Valeant’s overall EBIT

Of its three businesses, Bausch & Lomb’s share in Valeant Pharmaceuticals’ (VRX) overall EBITA (earnings before interest, tax, and amortization) was 32%, while Branded Rx’s share in VRX’s overall EBITA remained at 48% in 3Q16.

The falling cash cow segment, Diversified Products, contributed 35% of Valeant’s overall EBITA during the period. Let’s try to understand why there will be margin erosion for Valeant in 2017.

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Margin erosion in 2017

Valeant’s adjusted operating margin stood at 44% in 3Q16. Its Diversified Products business had the highest adjusted operating margin of ~81% during the quarter. As this business is poised to face a revenue fall, Valeant’s operating margins will be hurt badly in 2017.

Again, this will largely depend upon the intensity of the free fall in the Diversified Products business. To know more about the factors behind the business’s fall, read Neurology, Generics Businesses Drag Valeant’s 2017 Revenue and EBITDA.

Valeant’s peer Endo International (ENDP) is expected to face a revenue fall in 2018, whereas Mallinckrodt (MNK) and Teva Pharmaceutical (TEVA) are expected to witness modest gains.

Valeant’s Diversified Products business’s fall could be partially offset by its Branded Rx business, causing its share price to jump. By investing in the Vanguard FTSE All-World ex-US ETF (VEU), you can enjoy diversified exposure to risky Valeant.

Valeant is also rumored to be in talks with Takeda for the sale of its Salix business. With its 51% share in the Branded Rx’s business’s revenue, Salix is expected to be a major growth driver for Valeant beyond 2016. So why is Valeant selling its business? Let’s try to understand in the next article.

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