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Valeant Trims View, Likely to Face Credit Default; Shares Fall

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Shares of Valeant Pharmaceuticals International, Inc. plunged 51.5% after the company announced preliminary results for the fourth quarter of 2015 and also slashed its outlook for the first quarter of 2016 and full year.

On a preliminary basis, revenues for the fourth quarter were $2.8 billion, marginally lower than the Zacks Consensus Estimate. Earnings per share came in at 98 cents. On an adjusted basis, earnings per share of $2.50 were lower than the Zacks Consensus Estimate of $2.64.

Worse-than-expected earnings were primarily due to unexpected reductions in higher-margin product sales, driven partially by channel destocking, and a negative reaction to the company’s agreement with Walgreens Boot Alliance (WBA - Free Report) .

The company has also slashed its guidance for the first quarter of 2016, reflecting higher-than-expected inventory reductions, the transition from Philidor to Walgreens and the cancellation of almost all price hikes. The company now expects revenues of $2.3–$2.4 billion, down from the previous guidance of $2.8–$3.1 billion.

The company also lowered its forecast for 2016. It now projects revenue to come around $11.0–$11.2 billion, down from the previous guidance of $12.5–$12.7 billion. The company has been witnessing a slowdown in many of its businesses due to sluggish growth in the gastrointestinal business, including additional product destocking.

Valeant also recorded a weaker-than-expected rebound in dermatology, which includes additional product destocking and lost refills from the transition from Philidor to Walgreens. Moreover, other businesses such as ophthalmology and women’s health witnessed softness in the U.S., which adversely impacted the company’s business. The company also experienced headwinds from unfavorable currency fluctuations.

Consequently, Valeant now projects a lower growth rate in certain businesses such as dermatology, given continued external pressure on managed care, pricing environment and weak starts in 2016. The company expects strong growth in the GI business, contact lenses, oral health, oncology and generics in certain emerging markets, which will be offset by a slowdown in Western Europe, ophthalmology RX, Solta and Obagi. Moreover, the company experienced increased competitive pressure at the payer level, resulting in higher rebates for access to key growth products like Jublia.

Slowdown in the GI, dermatology and neurology portfolios mainly led to the lowered guidance for first-quarter 2016 revenues. The company, however, expects double-digit growth from the GI, Dendreon, dentistry, contact lenses and women’s health businesses over the next three years. On the other hand, the consumer ophthalmology business in the U.S., and the surgical and other aesthetics business, along with the dermatology business in emerging markets such as Asia and Latin America, should grow in single digits. Meanwhile, the neurology and other generic businesses in the U.S. and Western Europe are projected to be flat or decline.

Valeant might even default in its credit agreements due to a delay in the filing of the company’s 10k as both the credit agreement and the company’s bond indenture contain financial reporting requirements that have been impacted by the delay. The company may even have to resort to the divestiture of its smaller businesses this year in order to pay its debts.

Our Take

There seems to be no end to Valeant’s woes. The company was already under the spotlight since Aug 2015 and for all the wrong reasons, like a price hike of specialty drugs, erroneous financial reporting, and termination of contracts with Philidor Rx Services.

Valeant’s relationship with Philidor Rx Services, a specialty pharmaceutical company providing back-end services, came under the scanner in Oct 2015 after it was alleged that the latter was urging pharmacy benefit managers to opt for expensive drugs over their cheaper generics. Consequently, Valeant had to terminate its relationship with Philidor, whereby it lost 20% of prescriptions and $250 million in sales in the fourth quarter.

Last month, the company postponed its previously announced earnings call to discuss the preliminary fourth-quarter 2015 results and reported the identification of approximately $58 million of net revenue, previously recognized in the second half of 2014, which were supposed to be recognized on the supply of products to patients rather than on delivery to Philidor. This identification was based on the work of the Ad Hoc Committee of the board of directors, which was appointed to review the company's relationship with Philidor.

The trimmed guidance and a likely default as stated by the company might just be the final nail in Valeant’s coffin.

Valeant currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care sector are Corcept Therapeutics Incorporated (CORT - Free Report) and Actelion Ltd. .  Both the stocks sport a Zacks Rank #1 (Strong Buy).

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