Piper Warns Of Potential For 'Significant' Guidance Cut From Valeant

In a research note previewing the third quarter earnings reports in the Specialty Pharmaceuticals space, Piper Jaffray analyst David Amsellem told investors that Valeant Pharmaceuticals (VRX) is likely to fall short of Wall Street expectations, adding that he would not be surprised to see the company make a "major downward revision" to its 2016 guidance.

GUIDANCE CUT: Commenting on the Specialty Pharmaceuticals sector ahead of quarterly results, Piper Jaffray analyst David Amsellem recommended investors brace for a "significant downward guidance revision" from Valeant. The company's 2016 guidance implies revenue and earnings growth rates in the second half of 2016 of 7% and 48%, respectively, compared to the first half, Amsellem noted. This guidance reflects improving dynamics for the gastroenterology and dermatology segments as well as for emerging markets segments. However, the analyst cites IMS data on prescription trends for gastroenterology and dermatology businesses that he said simply do not reflect those hopes. Prescriptions for Xifaxan showed a third quarter sequential growth rate of 0.6% versus the previous quarter. The entire gastroenterology business and dermatology prescriptions declined by 4% in both cases, he noted. Additionally, Amsellem pointed out that the guidance implies significant improvement in average selling prices for both Xifaxan and the dermatology segment, but there is simply no basis for that coming to pass. The analyst reiterated an Underweight rating and $22 price target on the shares.

PRICING STRATEGY: On Monday, his peer at Wells Fargo had voiced concern over the pricing strategy for Valeant's Wellbutrin XL, used to treat adults with major depressive disorder and for the prevention of seasonal affective disorder. Wells analyst David Maris said that, traditionally, brands facing the type of generic competition that Valeant's Wellbutrin XL faces see erosion in "the 90% range" and he wondered how the drug still shows growth despite having ten generic competitors. Maris concluded that the answer to that question is "pricing," saying the company's pricing strategy for Wellbutrin XL is "unsustainable" and its distribution unclear. Therefore, Maris lowered his Wellbutrin XL forecasts as he sees a significant risk to sales. The analyst reiterated an Underperform rating on Valeant shares as well.

WHAT'S NOTABLE: Within the Specialty Pharmaceuticals space, Piper's Amsellem believes Akorn (AKRX) is best positioned for third quarter upside and a potential upward revision to guidance.

PRICE ACTION: In late morning trading, shares of Valeant have gained about 0.3% to $22.13. The company is scheduled to report third quarter results before the market open on November 8.