This Pharmaceutical Stock Promises Robust Returns
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The healthcare sector has always been a subject of great interest to investors and analysts alike. With the rise of sedentary lifestyles and increasing stress levels across demographics, the healthcare sector has a huge market to cater to.
Valeant Pharmaceuticals (NYSE: VRX) is a fast growing company in dermatology, ophthalmology and neurology. Over the years, Valeant has developed a disparate product portfolio comprising of prescription drugs, branded generics and Over The Counter (OTC) drugs.
While 65 % of its total revenue is driven by prescription brands; branded generics and OTC products account for 35% of the total revenue. Valeant Pharmaceuticals has presence across the globe, as it operates in the US, Canada, Central and Eastern Europe, Latin America, South East Asia and South Africa.
The year 2012, saw the company generate revenue from product sales of $3.31 billion, up 47% compared to $2.26 billion during 2011, despite suffering a loss of $161 million in revenues, owing to generic competition. The company delivered cash Earnings Per Share (EPS) of $4.51 during the financial year 2012, which is a growth of 54% compared to previous year. The net cash flow from operating activities in 2012 was $656.6 million, posting a 3% year-over-year growth.
The financial results for the first quarter of 2013 were nothing less than impressive with Valeant posting revenues of $ 1.03 billion from product sales, which is a 38% year-over-year growth, while delivering a cash EPS of $ 1.30, up by a staggering 41%.
GROWTH-Organic and Inorganic
Valeant Pharmaceuticals is a specialty pharma company catering to a niche segment, predominantly dermatology and neurology. The company’s growth strategy involves harnessing growth opportunities by seeking strategic alliances coupled with developing newer therapeutic platforms aimed at boosting its organic growth.
The company’s past acquisitions of Medicis Pharmaceutical Corporation, Dermik, Obagi Medical Products, and its merger with Biovail Corporation during 2010, have successfully resulted in it becoming a front-runner in the dermatology industry.
Keeping up with its tradition, Valeant is currently in the news for its decision to acquire Bosch and Lomb for $ 8.7 billion. The deal would give a huge impetus to Valeant’s ophthalmology business, while securing access to China and other high growth emerging markets.
Closely analyzing the key revenue drivers of Valeant Pharmaceuticals, the company’s major operational areas are the Ophthalmology, Dermatology and Neurology segments.
Driven by a surge in eye disease cases and an ageing population, the global ophthalmology market is estimated to touch a staggering $ 18 billion by 2018, growing at a Compound Annual Growth Rate (CAGR) of 5.1% from 2011 to 2018. The rise in related diseases causing eye dysfunctions such as diabetes and other hormonal disorders is another major contributor to the advancement of this industry.
Geographically, although the US is estimated to uphold its position as the market leader in the ophthalmology space holding 32.8% of the global ophthalmology devices market share in terms of revenue, emerging markets such as Brazil, China, Mexico and India are also estimated to expand at a double digit growth rate.
Considering Valeant’s major business operations are in emerging markets, the industry scenario looks favorable for years to come.
In view of the above, Valeant’s intended takeover of Bosch and Lomb would substantially strengthen its competitive position in terms of the profitability of its ophthalmology business.
Dermatology and Neurology
Another key business segment for Valeant’s is the dermatology division. Valeant has succeeded in establishing itself as a major player in the dermatology space by its carefully planned strategic alliances mentioned above.
The dermatological therapeutics market is estimated to grow at CAGR of 7.3% from 2010 to 2015. Driven by the expiration of patents and a steep rise in cases of psoriasis, acne, dermatitis and other skin conditions, the dermatological industry is expected to reach an impressive $ 25 billion by 2015. On the other hand, the global neurology devices market was expected to grow at a CAGR of 11.3% from 2008 to 2015 to surpass $4 billion by 2015.
Other revenue drivers of the company include OTC drugs and branded generics. The OTC drugs industry is estimated to exceed $ 70 billion by 2015. As against that, the branded generics segment accounts for 22% of the Valeant’s total revenue.
With the global generic market place set to grow at a respectable 11 % annually, emerging markets such as Brazil, Russia, Turkey, China and South Korea provide a robust platform for growth at a phenomenal 15-20 % annually. Given that Valeant’s key markets of operation are predominantly emerging growth markets, the future prospects for Valeant’s generic drug business look quite promising.
The Competitive Landscape
TEVA is a developer, manufacturer and distributor of pharmaceutical products on a worldwide scale. The company possesses a diverse product portfolio, primarily comprising of specialty medicines, generic and OTC drugs and active pharmaceutical ingredients.
The first quarter of 2013 was in line with the company’s expectations. It clocked an overall revenue of $4.9 billion and generated over a billion dollars in cash flows from operations.
The company suffered a 27% year over year decline in revenues from its generic segment in US, which is also its largest market contributing over 50% to its overall revenues.
Moving further, strong performance in Europe in all key segments clocking an overall growth of 11% year over year facilitated the company in sustain a robust performance during the quarter.
In order to bolster its growth, the company has been very aggressive on the Merger &Acquisition front, as it acquired Taiyo and Ratiopharm, which enabled the company into strengthening its generics business. Furthermore, the company also acquired Cephalon in order to penetrate the bio pharma space.The company possesses a strong balance sheet and presence across all major markets.
Another competitor to Valeant is Abbott Labs . Although Abbott Labs a much larger company relative to Valeant in terms of market capitalization, both are pharmaceutical giants.
Abbott Labs (NYSE: ABT) generates the highest percentage of its revenues through pharmaceuticals at around 62%, which is followed by nutritionals at around 18%. The remaining revenues come from diagnostics and vascular at around 12% and 8% respectively.
Within the pharmaceuticals division, Abbott's revenues are driven through AndroGel and Synagis. During 2009, revenues from AndroGel and Synagis declined slightly, however, the growth was back on track from 2011 onwards.
According to Trefis, this division holds maximum value in Abbott’s stock price. Trefis estimates a steady increase in revenues from AndroGel and Synagis over the next seven years. It should be well comprehended by investors that consistent growth in revenues from this divisions will ensure a healthy pay-out from Abbott's stock.
Valeant is a large specialty pharma company with a strong potential for upside growth in its top and bottom line in the medium to long term.
The company has been successful in developing a diverse business portfolio on the back of carefully designed expansion strategy, which makes the company resilient and competent to meet the dynamic challenges of the industry.
The impending acquisition of Bausch and Lomb will certainly ensure Valeant strengthens its ophthalmology division and catapults itself in the global league to become the 15th largest pharma company in the world and a significant player in the pharma segment.
With global economies on path to recovery and Valeant having exposure to the emerging markets, I believe it has a great future in store for itself.
Kiran Gulati has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!