Bausch Health Companies Inc. (then Valeant Pharmaceuticals International, Inc.) — Q2 2016 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2016. Valeant was a multinational specialty pharmaceutical and medical-device company operating in Developed and Emerging Markets. Unless noted, amounts are in U.S. dollars and millions. First-half 2015 comparisons are restated.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015, restated |
|---|---|---|---|---|
| Total revenue | $2,420.2 | $2,732.4 | $4,791.8 | $4,902.5 |
| Operating income | $80.5 | $341.5 | $146.7 | $912.5 |
| Net income (loss) attributable to Valeant | $(302.3) | $(53.0) | $(676.0) | $44.7 |
| Diluted EPS | $(0.88) | $(0.15) | $(1.96) | $0.13 |
| Interest expense | $472.5 | $412.7 | $899.1 | $710.5 |
| Operating cash flow | Not separately stated | Not separately stated | $1,006.2 | $901.6 |
- Revenue declined 11% in Q2 and 2% in the first half. Developed Markets revenue fell 14% in Q2 and 3% in the first half; Emerging Markets revenue was approximately flat in Q2 and up 2% in the first half.
- Operating margin, calculated as operating income divided by revenue, was approximately 3.3% in Q2 2016 versus 12.5% in Q2 2015, and 3.1% in the first half versus 18.6%.
- Cost of goods sold was 27% of revenue in Q2 and 26% in the first half, compared with 25% and 24%, respectively, in 2015. Management cited product mix, foreign exchange, lower dermatology and neurology sales, and lower realized prices.
- Amortization and impairment expense was $887.6 million in Q2 and $1.58 billion in the first half. Q2 included a $199 million impairment associated with Ruconest assets classified as held for sale.
- Cash and equivalents were $852.4 million at June 30, up from $597.3 million at year-end 2015. Current assets were $5.82 billion and current liabilities $4.23 billion.
- Total debt, including current portion, was $31.07 billion, versus $31.09 billion at year-end. Long-term debt was $30.77 billion; the current portion was $294.1 million. First-half debt repayments of $1.27 billion were substantially offset by revolving-credit borrowings and other financing needs. Interest expense rose 27% in the first half.
- First-half investing cash outflow was $62.1 million and financing cash outflow was $692.3 million. Financing uses included debt repayments, the $500 million deferred Sprout purchase payment, and $65.2 million of financing costs; revolving-credit borrowings partly offset these uses.
Material changes versus the prior period
- Q2 revenue fell $312.2 million year over year, chiefly from lower sales in existing businesses, pricing and rebate pressure, the termination of the Philidor relationship, foreign exchange, and product discontinuations. First-half revenue declined $110.7 million despite incremental sales from 2015 acquisitions, especially Salix and Amoun.
- Net loss attributable to Valeant widened to $302.3 million in Q2 from $53.0 million; first-half results swung from $44.7 million of income to a $676.0 million loss. Higher interest, weaker product contribution, increased amortization and impairments, and higher R&D contributed. Lower restructuring costs and more favorable other income partly offset these pressures.
- First-half 2015 figures were restated mainly for Philidor-related revenue recognition. The company concluded certain pre-consolidation sales should have been recognized on a sell-through basis or later when collectability was assured. The restatement reduced first-half 2015 revenue by approximately $20.8 million and increased net income by $24.0 million; it did not change total cash from operating, investing, or financing activities.
- Gross-to-net deductions rose to 40% of gross product sales in both Q2 and the first half, from 27% and 29%, respectively, in 2015, reflecting higher rebates, chargebacks, discounts and distribution fees, and fewer price-appreciation credits.
Outlook, management commentary and key risks
- Management said it expected available cash and operating cash generation to meet liquidity needs and debt maturities, but disclosed limited headroom on the interest-coverage covenant amid a slower-than-forecast dermatology recovery and delayed Salix revenue acceleration. It warned weaker results or ineffective cost actions could cause covenant noncompliance.
- The April 2016 credit amendment lowered the interest-coverage threshold to 2.75:1 through Q1 2017, raised borrowing costs by 1 percentage point through delivery of Q2 2017 financial statements, and imposed restrictions on acquisitions, debt-funded acquisitions, asset-sale proceeds, and certain investments and distributions. The company reported covenant compliance at June 30.
- As of the filing date, Valeant was seeking a further credit-facility amendment to increase flexibility and address limited covenant headroom; lender approval was not assured. Management planned to focus on debt reduction and keep acquisition activity minimal in 2016 and possibly beyond.
- Management identified key priorities including growing dermatology, GI and eye-health businesses; launching approved Oral Relistor; pursuing brodalumab approval and launch; improving Walgreens fulfillment arrangements; reducing debt; and strengthening the balance sheet. No specific consolidated revenue or earnings guidance figure is provided in the filing text.
- Pricing pressure and scrutiny remained significant. The company had established a pricing committee, enhanced hospital rebates for Nitropress and Isuprel, committed to no further price increases on those products, and said planned price reductions for certain dermatology and ophthalmology products remained under review.
- Material weaknesses in internal control over financial reporting—relating to tone at the top and non-standard revenue transactions—remained unresolved. Management concluded disclosure controls were ineffective at June 30. Remediation efforts were underway, but the plan for non-standard revenue transaction controls was to begin execution in the second half of 2016.
- Risks include ongoing government and regulatory investigations and litigation relating to Philidor, pricing, marketing, accounting and distribution; securities and other class actions; generic competition, particularly a challenge to Xifaxan patents; foreign-exchange exposure; impairment risk, including Addyi; and significant debt and refinancing/covenant risk. The filing does not quantify potential losses for many proceedings.
- Subsequent to quarter-end, the company disclosed a definitive agreement to sell North American Ruconest rights for up to $125 million, including $60 million upfront, subject to closing conditions; a new three-segment structure planned for Q3; and its intention to seek the additional credit amendment.
Most important facts for investors to verify
- Whether revenue trends, gross-to-net deductions, Walgreens arrangements and key-product volumes stabilized after Q2.
- Whether operating cash flow is sustainable after working-capital movements, acquisition-related effects, and the first-half cash-flow adjustments.
- Debt maturity and interest burden, actual covenant calculations and headroom, and the outcome and terms of the proposed credit amendment.
- Progress and independent validation of remediation of material weaknesses, and whether further restatements or filing delays arise.
- Developments, possible financial exposure and reserves for Philidor-related and other legal, regulatory, pricing and product matters.
- Ruconest sale completion and proceeds; impairment assumptions for intangible assets and goodwill, particularly Addyi; and commercial results for new and recently acquired products.