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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Valeant Pharmaceuticals

June 28th 2013 Valeant Pharmaceuticals
NYSE Symbol: VRX
Industry: drug maker
Price as of 6/28: $86.08

The market volatility is back with interest rates taking a sharp spike on Fed Chairman Ben Bernanke's comments last week. The markets dropped over 4% within a week and 6% from the highs set in May. This week the major averages bounced back as interest rates eased thanks to dovish comments from the rest of the Fed Board. Besides interest rates backing up, internationally global growth has slowed in the BRIC countries hitting the emerging markets. With uncertainty on the rise, investors may flock back to the defensive sectors that have taken a hit recently like telecom and utilities. Healthcare remains the best performing sector in 2013. The healthcare sector has been a subject of great interest due to the aging population, the rise of sedentary lifestyles and increasing stress levels across demographics. This week we'll highlight a fast growing company in the areas of dermatology, ophthalmology and neurology. The stock of the week is Valeant Pharmaceuticals (VRX). Valeant Pharma'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 vaulted the company to 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 stock jumped dramatically on the deal giving Valeant a boost to their ophthalmology business, while securing access to China and other high growth emerging markets. Valeant's earnings, sales, and stock price have grown dramatically giving Valeant a lofty valuation. The company's recent acquisitions have run their debt level up to $10 billion so conservative investors may shy away, but long term the company and industry growth prospects look compelling.

The last two years have been good to Valeant's earnings and stock price. In 2012, Valeant generated 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%. The future for Valeant Pharma is overseas expansion with a presence already in Canada, Central and Eastern Europe, Latin America, South East Asia and South Africa. Driven by a surge in eye disease cases and an aging 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. 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. 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 prospects for Valeant look great, but conservative investors may question the valuation. Currently, Valeant trades for 14.5 times earnings, 7 times book value and 7 times sales. The key is the growth. Next year earnings are expected to grow 32% to $7.77 for a forward PE of 11. Another positive is insider buying. Mason Morfit, a Director for Valeant bought 1,352,941 shares of company stock for $114,999,984. A wealthy guy. Valeant does not provide a dividend, but aggressive investors looking for a growth company in the healthcare space trading a little above market valuation may want to take a look at Valeant Pharmaceuticals.