Valeant Pharmaceuticals (VRX 2.22%) reported its third quarter earnings on Monday morning. In the context of Valeant's ongoing battle for control of Allergan (NYSE: AGN), both companies had suggested investors ought to view the third quarter as a litmus test of the former's acquisition-driven business model (Oct. 30 is the record date for Allergan shareholders who will vote on matters pertaining to the acquisition, including the appointment of a slate of independent directors.) In that context, Valeant's quarter looks pretty convincing.
Financials
Valeant produced adjusted cash earnings of $2.11 a share, beating analysts' consensus estimate of $1.99 a share. Revenue rose by a third to $2.06 billion, in line with Wall Street's expectations.
In order to defend against the charge that the company is over-reliant on acquisitions for growth, Valeant executives highlighted the company's 19% year-on-year growth "same store sales" (businesses that have been owned for at least one year.) Bausch & Lomb, the company's largest acquisition to date, produced 12% organic growth. Furthermore, companywide, volume increases were a bigger driver of growth than price increases.
Crucially, all of these metrics (and a couple of others) met or exceeded the company's own guidance, which ought to provide some reassurance that the goals it is setting for the Allergan acquisition are not far-fetched (nevertheless, if you want to read the contrarian case, you can check out a pre-emptive 30-page presentation Allergan published on Monday morning).
Looking forward
And speaking of guidance, Valeant also raised its fourth quarter adjusted earnings estimate range to $2.45-$2.55 a share, and its 2015 adjusted profit forecast to $10 a share. Analysts' expectations were $2.38 and $9.58 respectively.
Allergan acquisition
Valeant had some grist for the Wall Street information mill: CEO J. Michael Pearson giving the strongest indication yet that a raised bid for Allergan might be in the works, stating "we do have some more dry powder at the appropriate time, when the conditions are right... we are contemplating [Raising Valeant's bid for Allergan] and we may make that decision at any time."
If this quarter was a litmus test, Valeant appears to have scored a win: The stock rose 3.8% on Monday, narrowing the gap between the value of its current cash-and-share offer for Allergan and Allergan's share price. However, I expect Valeant will continue to face pressure to raise its offer; meanwhile, the long-term thesis for the stock requires the company to balance acquisitiveness and purchase discipline. We'll be monitoring this saga as it unfolds to verify that it strikes the right balance.
