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Valeant results will seek to make case for Allergan

Valeant Pharmaceutical’s offices in Montreal.


As part of its $48-billion (U.S.) bid to buy rival drug company Allergan Inc., Valeant Pharmaceuticals International Inc. is offering a big chunk of its own shares, in addition to about $15-billion in cash.

That means that if Valeant wants to win over Allergan shareholders, it has to show them the "currency" they will be receiving is good value and has strong growth potential.

Valeant, based in Montreal, will get the chance to underline its strong financial footing on Thursday, when it releases its first-quarter results.

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Already, Valeant chief executive officer Michael Pearson has said the company has done well in the quarter. At the April 22 news conference in which he outlined the details of the Allergan offer, he said Valeant will "meet or beat" expectations in the first quarter, despite a 15 cents per-share hit from foreign-exchange fluctuations.

In fact, he said, the company would raise its guidance for all of 2014. "The year is looking very good," he said. "We are off to a strong start. Our business continues to perform very well."

The problem with Valeant earnings is that its recent buying spree – it made two dozen acquisitions in 2013 alone – has generated one-time gains and losses that make it tough to figure out its true financial trajectory.

The profit picture is particularly hard to pin down. The company's reporting under generally accepted accounting principles (GAAP) sometimes shows losses, while its "cash earnings" – which back out acquisition-related amounts and most other one-time items – are much more positive. For example, in last year's first quarter, Valeant reported a GAAP loss of 9 cents per share, but "cash earnings per share" of $1.30.

Bill Ackman, the hedge-fund manager who is helping Valeant in its battle to buy Allergan, urged investors to "forget GAAP earnings" in his presentation at last week's press conference.

"What we focus on is economic earnings," he said. "We don't care at all about reported GAAP net income. If you look … at the history here, on a GAAP net-income basis, this looks like a disaster. It looks like a company heading off … into bankruptcy. But if you look at it on a free cash flow basis or on a cash operations basis, this company is generating enormous economic value."

Analyst Alan Ridgeway of Paradigm Capital Inc. in Toronto, said his primary interest when examining Valeant's first-quarter results will be revenue growth. "We are focused on the underlying growth of the business," he said. "We know management can cut costs. The question … is whether the company can maintain growth with their low-cost strategy."

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This is only the second quarter that will include numbers from Valeant's $9-billion acquisition of eye-care products company Bausch & Lomb Inc., which was completed last year. Consequently, "both the organic and pro forma growth numbers will be important to analyze in order to get a sense for how the business is doing," Mr. Ridgeway said.

One number that can't be misinterpreted is Valeant's stock performance. In the past year, its shares have almost doubled in price; since it first announced its merger with Canada's Biovail Corp. in mid-2010, the stock has risen almost tenfold.

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