Valeant Pharmaceuticals International (VRX) recorded a loss of 28 cents per share during the third quarter of fiscal 2010, way below the Zacks Consensus Estimate of earnings of 34 cents per share and the year-ago quarter’s earnings of 27 cents per share. The $95.9 million of restructuring expenses incurred during the reported quarter led to the earnings shortfall.
Third quarter revenues of $208.3 million were well below the Zacks Consensus Estimate of $226 million and 2% below year-ago revenues of $212.5 million. Lower product sales and research and development (R&D) revenues resulted in an overall decline in revenues.
Product sales amounted to $201.4 million during the quarter, down 1% from $204.3 million in the prior-year quarter. Decreased sales of Wellbutrin XL, Ultram ER, Cardizem LA and generic segment affected product sales.
R&D revenue declined 85.3% to $0.5 million during the quarter, as compared with $3.4 million in the prior-year quarter. The divestiture of Biovail’s contract research division to Lambda Therapeutic Research Inc. in July resulted in the reduction.
Expenses
Quarterly research & development (R&D) expenses of Valeant Pharma amounted to $14.3 million, reflecting a year-over-year decrease of 38%. The year-ago figure included an IPR&D charge of $8.1 million related to the fipamezole acquisition.
Selling, general & administrative (SG&A) expenses for the third quarter increased 34% to $60.2 million. The current quarter’s SG&A expense included a non-cash charge of $20.1 million due to the merger.
During the quarter, Valeant Pharma recorded merger-related costs of $28.0 million. The company also incurred restructuring charges of $95.9 million mainly associated with the merger.
Outlook
Valeant Pharma expects total revenue of $500 million and cash flow from operations of $200 million in the fourth quarter of 2010.
Further, the company expects fourth quarter revenues to be negatively impacted by over $20 million due to the entry of an authorized generic of Diastat, reduced ribavirin royalties and the elimination of Biovail R&D revenues and alliance revenue from GlaxoSmithKline plc (GSK).
Valeant Pharma plans to announce its guidance for fiscal 2011 in January. The company estimates total merger-related costs in a range of $135 million to $180 million. Valeant Pharma expects the combined company to generate $300 million in cost synergies, of which $200 million is expected in 2011 and the rest in 2012.
Dividend
Valeant Pharma declared a special dividend of $1.00 per share to be paid on December 22, 2010, to shareholders of record on November 15, 2010. The one-time dividend is being paid in connection with the merger of Valeant Pharma with Biovail Corporation.
Our View
Valeant Pharma is currently awaiting US Food and Drug Administration (FDA) approval for its lead pipeline candidate, ezogabine (epileptic seizures). Unfortunately, the FDA extended the review period for ezogabine by three months to November 30. Further, the company faces major challenges with its neurology product Diastat and HIV drug ribavirin exposed to generic competition. We believe the company needs to enter into suitable deals in order to compensate for the loss of revenues resulting from the genericization of Diastat and ribavirin.
We currently have a Neutral recommendation Valeant Pharma.
