Valeant Pharmaceuticals is sinking 16% in pre-market trading as cries are heard all over mid-town Manhattan. Companies of the pharma giant are down 14% at the time of this writing on disappointing earnings. The sell-side is quickly churning out notes on the news and we present brief excepts from the analysts’ commentary below (overall, it is bearish).
Valeant Pharmaceuticals – analysts react
JPMorgan states in an email to clients this morning:
Valeant Pharmaceuticals EPS came in 2.50 (vs. the St 2.61). Revs $2.8B (vs. the St $2.751B). Unaudited GAAP Cash Flow from Operations $562 million; Adjusted Cash Flow from Operations (non-GAAP) $838 million. Preliminary unaudited fourth quarter results were impacted by softer-than- expected sales of the gastrointestinal business, as compared to previous guidance issued in December, driven by reductions in the wholesale and retail channel in reaction to Valeant’s announcement of an agreement with Walgreens. For Q1/Mar they see revs $2.3-2.4B (vs. the St $2.8B) and EPS 1.30-1.55 (vs. the St 2.63).
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Valeant Pharmaceuticals is working diligently and intends to file the Form 10-K as promptly as reasonably practicable. “We are comfortable with our current liquidity position and cash flow generation for the rest of the year, and remain well positioned to meet our obligations”.
Negative. The quarter was worse than we expected, the guidance was worse than we expected, and the timing of the 10-K is still uncertain. Unless management has more positive comments on the call, these results and guidance are unlikely to meaningfully improve investor confidence, in our view.
We think today’s results and guidance reflects VRX’s effort to adjust to a new distribution structure quickly to bring the business back to normalcy to drive volumes and organic growth and demonstrate the power of its diversified platform. VRX still awaits completion of its internal review and as such has not yet released its 10-K. Results are preliminary
No update on the timing of Valeant’s 10K filing. Valeant previously announced that it would delay its 2015 10-K filing due to a potential $0.09 EPS restatement relative to Philidor (with earnings effectively moving down in 4Q14 and up in 1Q15). We will listen for more color on this topic on today’s call, but we anticipate that Valeant will be able to file its 10-K in the near term (i.e., over the next several months) to the extent the issue is contained to this relatively minor change in 2015 financials.
Guidance cut. 2016 revenue guidance is $11.0-$11.2B (prev. $12.5-$12.7B); midpoint of $11.1B (down 12% from $12.6B) is 8% below our $12.0B and 11% below cons’ $12.4B. Adj. EBITDA guidance is $5.6-5.8B (prev. $6.9-$7.1B); midpoint of $5.7B (down 19% from $7.0B) is 12% below our $6.5B and 14% below cons’ $6.6B. Adj. EPS guidance is $9.50-10.50 (prev. $13.25-$13.75); midpoint of $10.00 (down 26% from $13.50) is 19% below our $12.28 and 24% below cons’ $13.24.
Our takeaway: Valeant Pharmaceuticals Revised 2016 guidance worse than expected Many people were expecting guidance to come down; however, this is probably worse than expected. Management indicated in the press release that the revised guidance reflects continued inventory de-stocking in dermatology and GI, revenue shortfalls in certain businesses and increased spending in areas such as financial reporting, public and government relations, compliance etc. The good news is that the implied 1Q17 revenues guidance of $2.9-3.0B (implying a run rate of ~$12B in 2017 vs. UBSe of $12.8), seems to indicate alleviation of a lot of the pressures in the business as Valeant moves into next year. It appears that management is taking the opportunity to reset expectations significantly.
Guidance was lowered to reflect reduced revenues from businesses such as Ophth, ROW Developed, Women’s Health, and Surgical. Management also noted that Q1/16 will be affected by inventory de-stocking in derm and GI. We note that we anticipated revenue guidance would be in the $12-12.4B range, EPS in the $12-13/ sh. range, and Adj. EBITDA in the $6.5-6.8B range. We believe the Street will be surprised by the magnitude of the guidance revision and anticipate it could cause concern unless it is properly addressed on the conference call.
The stock will likely be weak (although it’s obviously been VERY weak) because of the light guidance, but we think: 1) with the revised numbers, some near-term uncertainty is now behind Valeant; 2) Xifaxan will be the engine of growth and we don’t expect Gx to enter until 2029; 3) there will be more optimism in 2H2016 as the company aims to focus on volume growth instead of price; 4) TRx trend of major products has not been affected despite cutting ties with Philidor.
FY16 guidance clearly below expectation (EBITDA $5.6 – $5.8B vs investor expectation of $6-6.5B … similarly, EPS $9.50-$10.50 vs investor expectation of $11+ (which is up from ~$10-11 when they first pulled guidance)
So why is that?
Turns out, 3 reasons:
- 1Q16 has a clear disruption in business … press release talks about destocking in derm, GI and reductions in several businesses like ophthalmology, skin, Europe etc (details below)
- I sense some disagreement between mgmt and Board … see this quote from Mike Pearson:
- “In discussion with the Board, we have assumed lower growth in our U.S. dermatology, gastrointestinal, and woman’s health portfolios, as well as certain geographies like Western Europe, while keeping our expenses largely unchanged”
Setting up expectations for beat (“we hope to beat this guidance in the quarters to come”)