Valeant's rosy forecast and promised changes, fire up shares

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Drugmaker Valeant Pharmaceuticals, a fast-growing Wall Street darling until its price-hiking business strategy made it a symbol of pharmaceutical company greed, said it's undergoing a restructuring as its new CEO attempts to return the debt-laden company to growth and respectability — without big price increases.

"We have begun the process to stabilize, turn around and transform Valeant" into a new company over the next several years, Joseph C. Papa, who became chief executive three months ago, said during a conference call to discuss a money-losing second-quarter with results far below Wall Street expectations.

The maker of Bausch & Lomb contact lenses and toenail fungus fighter Jublia said its turn-around plan includes boosting sales of its dermatology, eye care and gastrointestinal medicines; improving its pipeline of experimental drugs in those categories, and using its cash more efficiently.

Analysts on the call, some sounding skeptical the Canadian company's behavior has changed much, peppered Valeant executives with questions about their plan, assumptions underlying rosy performance projections, and progress repairing tattered relations with insurers, doctors and patients. Many were alienated by years of repeated, aggressive price increases for Valeant medicines.

Papa said he's "confident" Valeant's "future is bright," given its new strategy, numerous appointments and promotions to top management announced Monday, and the replacement of 10 of its 12 board members.

Investors, hurt as Valeant stock lost more than 90 percent of its value the past year, seemed reassured that Valeant reaffirmed projections for 2016 earnings of $6.60 to $7 per share, excluding one-time items, and revenue of $9.9 billion to $10.1 billion.

Shares jumped 21.5 percent, or $4.86, to $27.30 in afternoon trading.

Valeant Pharmaceuticals International Inc., based in Laval, Quebec, has been under a microscope for repeatedly buying other drug companies and rights to older medicines with little or no competition, then quickly jacking drug prices up threefold or more, without improving those drugs or investing much on developing new ones.

Its spate of acquisitions and soaring revenue propelled its stock through the roof, but it ran up a staggering $30 billion in debt — roughly three times its annual revenue.

As soaring drug prices became a hot election-year political issue, Valeant has been hit with criticism from presidential candidates, plus three ongoing federal probes into its accounting and business practices. That heat forced it to say it will now stick with small price hikes as it pushed out J. Michael Pearson, the CEO behind the buy-and-hike strategy.

On Tuesday, Valeant said it expects to use savings from cutting jobs and supply costs, plus revenue from selling rights to some non-core drugs, to pay off at least $5 billion in debt within 18 months. But just months after briefly defaulting on some loans because it hadn't filed required financial reports, it's negotiating lower interest rates on some debt.

"After claiming it would have no problems meeting its debt obligations, the company now says it wants a second round of debt-terms relief and will be selling billions of dollars of assets to raise cash," warned Erik Gordon, a professor and pharmaceuticals analyst at University of Michigan's Ross School of Business.

"The business model can't be tweaked. It has to be abandoned," Gordon added. "The overload of debt leaves the company with limited resources to implement the radical changes the company needs. And the company has to reinvent itself while it is distracted with asset sales and financial restructuring. It has to accomplish three difficult endeavors at the same time, and quickly."

Meanwhile, insurers and other payers trying to reign in their medicine costs have squeezed Valeant for bigger discounts and rebates. That slashed revenue from developed countries 14 percent in the quarter.

As a result, Valeant posted a loss nearly six times higher than a year ago, amid an 11 percent plunge in total revenue, legal and restructuring costs and a nearly $900 million writedown in the value of assets.

The net loss amounted to $302.3 million, or 88 cents per share. Earnings, adjusted for many one-time gains and costs, came to $488 million, or $1.40 per share. Analysts had expected $1.61.

Revenue tumbled to $2.42 billion, below expectations for $2.59 billion.

Valeant, once known for gutting research operations of companies it snapped up, stressed that it increased R&D spending 50 percent to $124 million in the quarter. Other drugmakers typically spend up to 20 percent of revenue on creating new medicines.


Follow Linda A. Johnson on Twitter at\_onpharma.

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