Valeant Reports In Line 1Q, Again Exceeds Synergy Targets

Valeant VRX reported first-quarter results that were largely in line with our expectations and we do not anticipate making any changes to our fair value estimate or moat rating. Revenue grew 25% and cash EPS grew 43% over the prior year, largely because of the integration of Medicis.

The firm continues to see very strong performance in the emerging markets, and shows no signs of slowing down. As a whole, the segment posted 11% organic growth, including an impressive 28% growth rate in the firm’s new and still relatively small South East Asia/South Africa region. Eastern Europe grew 11% and Latin America increased 8%. The firm has been slowly testing the waters in the South East Asia market with small investments, but management seemed optimistic, and given the strong performance so far, we would expect to see Valeant make additional investments in the region. U.S.-promoted products had solid 6% growth despite the headwinds of some exclusivity losses, and as expected, the U.S. Neuro business was the laggard with a 10% organic decline in sales.

Management also raised its full-year cash EPS guidance $0.10 from $5.45-$5.75 to $5.55-$5.85. The change was due to a number of moving parts, including the addition of the Obagi acquisition and better than expected cost synergies with the Medicis integration. However, it was partially offset by unexpected generic competition to Zovirax, which is expected to reduce EPS by $0.30-$0.40 in the year.

The firm added to its already outstanding track record of acquisition synergies this quarter. Once again, Valeant is poised to far outpace initial synergy estimates. On the Medicis deal, initial estimates were for $225 million of annual synergies, and after increasing that estimate to $275 million last quarter, management has again raised its estimate and now forecasts more than $300 million in annual savings. Remarkably, this $300 million in savings would be about a third of Medicis’ total sales and well over half of the firm’s previous operating expenses. Similarly, the firm has founded significant synergies in the recently closed Obagi Medical acquisition. Obagi had previously been relying on distributors for its international sales, but it will be able to utilize its own salesforce because of Valeant’s existing international infrastructure. Management had initially expected to realize $40 million in synergies, but it is now is looking for $50 million. Management did not comment on the Actavis rumors, but reiterated that it is actively seeking assets with robust cash flows and highgrowth opportunities.

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