UPDATE 5-Valeant says can contain hit to dermatology, projects 2016 growth

* Shares rise 8 percent

(Adds detail from meeting, CVS Health (N:CVS) comment)
By Caroline Humer and Carl O'Donnell
Dec 16 (Reuters) - Drugmaker Valeant Pharmaceuticals (N:VRX)
International Inc VRX.TO VRX.N on Wednesday said that
fourth-quarter profit was hit when it cut ties with pharmacy
Philidor Rx Services, but that it could contain the damage next
year and grow profit.
The company said it would rebuild lost business through a
distribution agreement with Walgreens pharmacies announced on
Tuesday, and said the arrangement would also help sales of
products like Xifaxin for irritable bowel syndrome and Addyi, a
new sexual dysfunction treatment for women.
The Canadian drugmaker forecast 2016 earnings would grow 30
percent to $13.25 to $13.75 per share off a lowered 2015
outlook, just below Wall Street's highest expectations.
Valeant shares rose 8 percent to $118.75 in New York
trading, gaining ground as Chief Executive Michael Pearson (L:PSON) led
investors through a four-hour meeting in which he defended the
company's plan to rebuild its dermatology business.
In October, shortseller Citron Research accused Valeant of
having inflated revenue, and several news outlets including
Reuters reported on how Philidor used aggressive tactics to try
to increase insurer reimbursement, mostly for dermatology drugs.
Valeant has denied the shortseller accusations and a board
committee is investigating the Philidor situation.
The news had knocked shares from an August high of $263.70
to a low of $69.34 on Nov. 18. They have since recovered, helped
in part as its largest investor, Bill Ackman's Pershing Square (N:SQ)
Capital Management, increased its stake.
Pearson declined to give an update on the investigation, or
comment on investigations by U.S. prosecutors in New York and
Massachusetts and by Congress over the company's history of
price increases and its patient access programs.
He denied that the company was considering a break-up, a
possibility raised by large investors as a way to recover value,
and told investors that the Philidor situation was behind them.
The company stopped using Philidor in October, losing 20
percent of its dermatology prescriptions and $250 million in
sales in the fourth quarter, Pearson said. Valeant also rolled
back all price increases it had planned during the quarter.
"We've moved on from Philidor. We ended our relationship and
now we have Walgreens. Walgreens is about as reputable as you
can get," Pearson said.
Valeant's announcement on Tuesday of the distribution deal
with Walgreens Boots Alliance Inc WBA.O boosted shares, but
investors questioned how Walgreens could drive sales if pharmacy
benefit managers still refuse to cover Valeant drugs.
The two largest U.S. drug benefit managers, Express Scripts
Holdings Corp ESRX.O and CVS Health CVS.N , do not pay for
many drugs Valeant sells because they prefer patients use
typically less costly generic versions.
CVS Health CEO Larry Merlo told investors at its own
investor meeting on Wednesday that the agreement between Valeant
and Walgreens appeared to be an attempt to circumvent its
policies meant to drive down costs for insurers and employers.
He noted the government does not approve of these programs or
allow them in healthcare plans like Medicare.

2016 PROFIT OUTLOOK
Valeant, which has been criticized for a business model that
depends on growth through purchasing companies and making large
price increases on their older drugs, said 2016 sales would be
driven by volume and pledged to cut prices.
Political pressure on price hikes, and a heavy debt load
from buying Salix Pharmaceuticals as well as its stock decline,
has forced Valeant to change strategy. It predicted no major
deals next year but said it hoped to do some small purchases.
"That is a shift in strategy but it is one that is
consistent with the way the world is going right now," Pearson
said.
The new Walgreens agreement, which starts in January, will
be similar to the one with Philidor, he said. Valeant will allow
customers to receive the prescription immediately and take the
risk that it may not receive reimbursement from pharmacy benefit
managers down the road.
Pearson said that such payers would benefit from price cuts
on more than 30 branded products to match generic prices.
Customers would benefit from the patient access program, in
which it offers coupons or zero co-pays to cut the patient
price.
A poll of more than 200 investors by ISI Evercore recently
found about 25 percent expected 2016 earnings of about $14 per
share and 23 percent expected $13 per share.
Valeant forecast that another closely watched metric, cash
earnings, would be $6.9 billion to $7.1 billion in 2016. It said
that was about $500 million lower than previously forecast
because of the costs of setting up the Walgreens deal, about $75
million in retention payments it has planned for 700 employees,
planned price cuts and restructuring charges.
About 22 percent in the ISI Evercore poll expected cash
earnings of $6.5 billion and 18 percent expected $6.75 billion.
Valeant also said it will cut its debt by about $2.25
billion in 2016 and book revenues of $12.5 billion to $12.7
billion, compared with 2015 sales it estimated at $10.4 billion
to $10.5 billion.
The company cut its 2015 profit forecast to $10.23-$10.33
per share from $11.67-$11.87.