Why Valeant Pharmaceuticals Intl. Inc. Shares Popped

Valeant introduces its fiscal 2014 guidance.

Jan 7, 2014 at 1:55PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Valeant Pharmaceuticals (NYSE:VRX) shot higher by as much as 12% after the Canadian pharmaceutical and medical devices giant introduced its revenue and earnings-per-share forecast for fiscal 2014.

So what: According to a Reuters report today, Valeant projected revenue in the range of $8.2 billion-$8.6 billion -- an approximately 40% increase from the previous year -- with adjusted EPS of $8.25-$8.75. By comparison, Wall Street estimates are calling for $8.71 in EPS on just $8.28 billion in revenue. Keep in mind that much of this growth derives from its purchase of Bausch & Lomb last year, but it points to an ongoing trend from Valeant of growth through acquisitions. Just last month, Solta Medical (NASDAQ:SLTM) also agreed to be acquired by Valeant.

Now what: There are two ways to grow in the pharmaceutical sector: through organic pipeline development or by acquiring successful companies. Both have their risks, but Valeant seems to have chosen the latter. The risk in this method is that proven companies can command hefty buyout premiums that could leave Valeant's profit reeling in comparison to its revenue growth over the next couple years. I do, however, agree with CEO Michael Pearson that Valeant has the potential to become a top-five pharmaceutical company by the end of 2016. As an investor I wouldn't recommend chasing shares higher today, as further acquisitions could pressure Valeant's bottom line, but I would certainly keep it on your watchlist and consider it a potentially attractive buy on any significant weakness.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends Valeant Pharmaceuticals. 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.

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