* Generics cut into sales of Wellbutrin antidepressant
* U.S. Medicare reform held back sales
* Company offers weak third-quarter outlook
* Shares fall 18 pct after 78 pct increase this year (Adds comments, details; In U.S. dollars unless noted. Corrects typo in 5th paragraph)
By S. John Tilak
TORONTO, Aug 4 (Reuters) - Valeant Pharmaceuticals International Inc (VRX.TO)(VRX.N) said new generic rivals cut into sales for one of its top drugs, overshadowing a sharp rise in quarterly earnings and sending its shares down 18 percent.
Sales of Wellbutrin XL, an antidepressant that accounted for about 7 percent of revenue in the second quarter, would likely keep falling, Valeant said.
The company, one of the most acquisitive in healthcare, sees difficulties ahead in the United States, one of its main markets.
"There were no major red flags, just some yellow flags like the pace of the decline of Wellbutrin," said Susquehanna Financial analyst Gary Nachman, who termed the quarter as "neither good, nor horrible". "The extent of the sell-off was a significant overreaction."
The stock had risen 78 percent since the start of the year, lifted by a string of acquisitions and Valeant's consistent record of topping estimates and raising its forecasts.
Thursday's decline wiped out nearly $2.8 billion of Valeant's $15.5 billion market capitalization.
"The share price fall suggests something is fundamentally broken, but that's not the case," Canaccord Genuity analyst Neil Maruoka said. "The stock was priced to perfection."
The company reported its results on a day when stock markets around the world dived on concerns about the health of the global economy.
"Investors were surprised by the level of competition they faced in neurology," Morningstar analyst David Krempa said. "Wellbutrin has already been losing market share and they've just been trying to hold steady."
Valeant's second-quarter net earnings rose to $56 million, or 17 cents a share, from $34 million, or 21 cents, a year earlier. The per-share figure dropped as the number of shares outstanding doubled.
Cash earnings were 73 cents a share, including an extraordinary gain of 6 cents a share. Revenue was $609 million.
Cash earnings per share is arrived at using the cash flow instead of the net income.
The company sees third-quarter earnings of 55 cents to 60 cents a share, implying that Valeant will have a lot of work to do in the fourth quarter to meet 2011 targets, Nachman said.
Analysts on average were expecting 69 cents a share.
Shares of Valeant dropped 15 percent at C$42.69 on the Toronto Stock Exchange and were down 16 percent at $43.77 on the New York Stock Exchange by Thursday mid-afternoon.
Valeant President Rajiv De Silva said on a conference call with analysts that U.S. Medicare reform held back second-quarter sales and the company would face more headwinds in the United States in the second half of the year.
The company still raised its earnings forecast for the year by 5 cents a share and said it expects to meet its annual revenue growth target of 8 percent, excluding new acquisitions.
Last month, media reports said Valeant had approached Swedish specialty drug maker Meda AB MEDAa.ST about a possible acquisition.
Valeant dropped a $5.7 billion bid for U.S. drugmaker Cephalon Inc CEPH.O in May. Chief Executive Michael Pearson told Reuters last month it was seeking acquisition targets.
$1=$0.97 Canadian Reporting by S. John Tilak, editing by Gerald E. McCormick, Lisa Von Ahn and Peter Galloway