Valeant to focus on smaller private acquisitions in 2015 as outlook boosts shares

MONTREAL – Following Valeant Pharmaceuticals’ very public and unsuccessful attempt to take over California-based Allergan, the Quebec-based company plans to focus this year on small- to medium-sized acquisitions from privately owned companies.

“That’s been our history. That’s sort of where our pipeline is, now…and that’s what you should expect for 2015,” CEO Michael Pearson said Thursday in a conference call to outline Valeant’s outlook for the coming year.

It spent a total of US$1.3 billion for 25 tuck-in acquisitions in the past year, including two in the fourth quarter. Of the more than 100 deals opportunities it is evaluating, most fit into this mould. However, Pearson said Valeant wouldn’t exclude pursuing a large transaction if the price is right.

The Quebec-based company told analysts that the company will focus primarily on deals in high growth areas of the world such as Asia, the Middle East, Latin America and Africa, along with deals in the United States.

Pearson said the company will remain disciplined in how much it will pay and has “zero appetite” to use Valeant stock as part of a transaction, as it did with its bid for Allergan — which was worth nearly US$55 billion when Pearson quit the attempt.

“We think we are significantly undervalued and we think if we deliver or beat this guidance, that actually our stock will get back to where it’s supposed to be,” he said. “So, it would be a rare transaction that we would use our stock.”

Valeant’s shares hit an all-time high of C$185.28 in Thursday trading on the Toronto Stock Exchange before giving up some of those gains to close up $10.64, or 6.2 per cent, at C$182.28.

Pearson disclosed that he signed a new five-year employment that eliminates his base salary and ties his compensation entirely to achieving annual growth targets of more than 10 per cent.

Looking back at the blockbuster bid for the maker of Botox, he said it would have been successful if a higher bid hadn’t emerged from Actavis, a which agreed to pay US$66 billion in cash and stock.

“I remain convinced that the fit between Valeant and Allergan was unparalleled and we would’ve ultimately prevailed absent another bidder.”

Allergan had also fought a prolonged publicity and legal campaign against Valeant and its backer, New York-based hedge fund Pershing Square, which is headed by activist investor Bill Ackman.

Valeant said it expects this year’s revenue will be 14 to 15 per cent higher than in 2014 and that earnings and cash flow will grow at an even faster pace.

The Laval-based company estimates 2015 revenue of between US$9.2 billion and US$9.3 billion, up from an estimated US$8.1 billion last year.

The company also estimates 2015 cash earnings per share of between US$10.10 and US$10.40 per share, up from an estimated US$8.32 in 2014.

Cash flow from operations will be above US$3.1 billion, compared with about US$2.5 billion in 2014.

“All the successes from 2014 and our prospect for 2015 and beyond continue to validate that Valeant’s business model is both sustainable and value creating,” Pearson said.

The latest projections were slightly ahead of analyst expectations. Thomson Reuters data indicates analysts had estimated 2015 revenue of about US$9.1 billion and US$10.06 per share in earnings.

Douglas Miehm of RBC Capital Markets said the guidance was positive but as expected contained few surprises considering much of it was telegraphed in November financial disclosures during the Allergan courtship.

He said the expected US$300 million hit from a higher U.S. dollar and US$200 million from the loss of patent protection on some products appears to be “manageable” because it is largely offset by about US$500 million of revenues expected from key new programs.

He noted that the Jublia topical prescription to treat toenail fungus has been aggressively promoted in TV advertising and is expected to deliver US$300 million to US$400 million in annual revenues.

Almost half of Valeant’s sales come from outside the United States. Sales from Russia has taken the biggest hit as the ruble has lost nearly half its value against the American dollar.

Valeant also raised its guidance for the fourth quarter. It expects to earn more than US$2.55 per share on US$2.2 billion of revenues. The currency hit should be around US$50 million while Jublia sales should exceed $50 million. The outlook excludes about US$300 million gained from the sale of Allergan shares it owned with Pershing Square Capital.

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