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Acquisition spree muddies Valeant's financial trajectory

Valeant Pharmaceuticals International Inc. is paying the price for a rapid-fire string of corporate acquisitions and divestitures that has propelled its stock price and revenue skyward, but left investors confused about what comes next.

Shares of Canada's biggest publicly traded drug company took a substantial hit Thursday after it reported a $12.9-million loss in the first quarter.

The stock fell 9 per cent to close at $50.61 a share on the TSX, after a volatile day of trading that saw it initially rise sharply, then drop as much as 12 per cent.

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Many analysts were puzzled by the fall, because Valeant actually boosted its guidance for the full year, and the operating results were close to what they had predicted.

But Valeant's recent acquisition spree – along with a handful of divestitures – has muddied the waters, generating many one-time gains and losses that make it much harder to determine the company's financial trajectory.

On Thursday Valeant announced its latest purchase, the $64-million acquisition of skincare products from California-based University Medical Pharmaceuticals Corp. Valeant has closed eight transactions so far this year, and has three more set to be finalized by mid-year.

As a result of those deals, the company took almost $70-million in restructuring charges in the quarter, pushing it to the loss position.

But it was the extraordinary gains from the sale of two dermatology drug businesses that seems to have caused worry among investors. While total revenue was $856-million in the quarter – a remarkable 50-per-cent gain from the same quarter a year earlier – about $66-million of that came from the sales of the dermatology products. This pushed the numbers "slightly below consensus," analyst Douglas Miehm of RBC Dominion Securities said in a report.

"On balance, we believe the outlook is obviously positive," Mr. Miehm said. Like many of the analysts who cover the company, he has a "buy" recommendation on the stock. Some have 52-week target prices on the shares as high as $74.

Valeant chief executive officer Michael Pearson was upbeat on a conference call with analysts, noting that the company was growing sharply in all parts of its diverse geographic footprint. The Canadian and Australian businesses grew 22 per cent in the quarter compared with the previous year, while emerging markets in Latin America, Europe, Southeast Asia and South Africa saw sales rise by 12 per cent.

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In Europe alone, the company expects to launch more than 250 products this year.

When it comes to further acquisitions, "our deal pipeline remains very robust and we would expect to continue to be active throughout 2012," Mr. Pearson said.

The new guidance Valeant released for the balance of this year suggests the company will post cash earnings ranging from $4.45 to $4.70 a share for all of 2012, 50 cents higher than the previous range of $3.95 to $4.20 per share.

But this incorporated the unexpected one-time gains in the first quarter, so analysts adjusted the guidance increase to around 25 cents a share.

Still, one analyst who did not want to be identified said the company's financial position is very close to what most had projected, so "I'm a little shocked [the stock]is down so much."

The market reaction is an "exaggeration" added Annabel Samimy, an analyst with Stifel Nicolaus in New York.

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In a sign of just how far Valeant has evolved since it merged with Biovail Corp. in 2010, the company pointed out that several of the key legacy neurology products it inherited from the Biovail portfolio are now in decline.

Wellbutrin XL, the antidepressant that was the flagship Biovail product for many years, has seen sales drop sharply as a result of generic competition, Valeant said, while the heart drug Cardizem CD and pain reliever Ultram ER recently lost patent protection and will see declines.

Despite the drop in Valeant's stock yesterday, the shares have roughly doubled since the merger with Biovail was completed in September, 2010.

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More

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