Winston Churchill once said, "There is nothing wrong with change, if it is in the right direction."

ICN Pharmaceuticals lacked focus and direction following the resignation of its founder Milan Panic in 2002. The company was a mess with sinking sales, the loss of two key patents and a bunch of divisions with little in common and no clear strategy.

It was time to change. In November 2003, the drugmaker renamed itself Valeant Pharmaceuticals (NYSE:VRX - News) and began to shed business units from the 1960s and operations in Asia, Argentina and parts of Europe.

The decisive move came when it hired Michael Pearson to take the helm in January 2008. The new CEO steered Valeant in the right direction with deft maneuvers that produced gains right away.

"Valeant's a more specialized and lower-cost business," wrote Morningstar analyst Meera Venu. "The restructuring process has only just begun. Valeant aims to focus on dermatology and neurology drugs and cut operating costs."

Reining In R&D

After sharpening its focus on the two product areas, Pearson reined in research and development spending by forming joint ventures with drugmakers, such as GlaxoSmithKline (NYSE:GSK - News) and Sweden's Meda.

The aim is to share R&D costs. Just two years ago, Valeant was spending more than $100 million a year on only three R&D projects. It's less than half that now, falling 51% in the third quarter from last year.

But cost-cutting measures were only going to get the firm so far. It was time to go shopping.

Despite a deepening recession, Valeant shelled out more than $550 million on acquisitions in 2008 and 2009. Through strategic buyouts, it expanded its footprint in emerging markets and built up a depleted product pipeline, which had been a drawback on the company, says David Amsellem, an analyst at Piper Jaffray.

"They're committed to returning growth back to branded generics abroad and specialty pharmaceuticals in the U.S. and Canada, but it's too soon to tell if the strategy will pay off," Amsellem said.

The blockbuster of its spree came last December with the $285 million purchase of Dow Pharmaceutical Sciences. At the time, the maker of drugs for skin diseases had just won U.S. approval for acne gel Acanya. It also gave Valeant four medicines in its dermatology pipeline.

Some analysts say the company overpaid for Dow, but Ladenburg Thalmann analyst Juan Sanchez says the buyout makes Valeant one of the most important players in the U.S. dermatology space.

Its 2009 acquisitions were aimed at growing its presence in three key geographies: Latin America, Central Europe and Australia.

It snatched up drugmakers in Poland, Australia and Mexico at a cost of roughly $150 million. The deals expanded Valeant's footprint and distribution in those regions, a difficult task for many multinational drugmakers to achieve, especially in Mexico, Sanchez says.

"Their recipe is working," he said. "We believe the diversification, operating efficiencies and goodwill of its businesses in emerging markets, mainly in Mexico and Poland, will provide for the generation of strong cash flows in the long term."

After three quarters, Valeant said it generated over $170 million in adjusted cash flow and is on target to meet its goal of over $200 million in 2009. While the firm will continue to grow this number in years to come, it will also ensure it spends wisely, Pearson says.

Five Out Of Six Ain't Bad

"As important as generating cash is, it is equally important what we do with it," Pearson said in the conference call. "I am pleased to report that on the six acquisitions we evaluated this year, we are ahead in revenues for five of the six and ahead on cash generation for all six."

Revenue shot up 31% to $220.3 million in the third quarter. That was above the $193.5 million expected and marked the third straight quarter of double-digit growth. Earnings soared 427% to 58 cents a share, ex items, beating views by 9 cents.

Valeant raised its 2009 profit forecast to a range of $2.10 to $2.20, up from $1.90 to $2.10. Analysts were not surprised, given the recent flurry of acquisition activity.

Sales in its specialty pharmaceuticals business jumped 45% to $101.6 million. There's a need to fill a hole in the neurology pipeline given that Valeant's current epilepsy drug, Diastat, is expected to lose its patent in 2010.

"There are several product patents expiring in the next two years, and the reality is that the epilepsy space is heavily genericized, creating some head winds," Amsellem said.

But there is hope on the horizon. Valeant and GlaxoSmithKline have filed a new drug application for retigabine, a treatment for pain related to complications from shingles, with U.S. and European health regulators.

"If approved, we think this drug can hit the market in 2010 and could become a blockbuster product, propelling growth rates in Valeant's neurology franchise," Venu wrote.

Still, analysts believe long-term growth will hinge on its own generics-based businesses, which operate mainly abroad and account for roughly 40% of revenue.

Last quarter, branded generics sales in Latin America dipped 5% to $40.7 million, while generics in Europe hit $40.2 million, unchanged from last year.

The company laid out six goals for 2010. Sanchez says the most attainable include growing its dermatology business to $500 million, delivering on acquisitions measured by cash flows and sales, and increasing sales in Latin America and Europe to $500 million combined.

Recent purchases, such as in Poland and Mexico, will help push sales to $400 million, Sanchez says. But Valeant must make at least one more buyout to achieve its sales target, he says.

"We expect the firm to continue making small, tuck-in acquisitions to bolster its presence in these markets and expand distribution," he said.