Bausch Health Companies Inc. (then Valeant Pharmaceuticals International, Inc.) — Q1 2016 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2016. Valeant was a multinational specialty pharmaceuticals and medical-device company operating in Developed and Emerging Markets. Results include acquisitions completed during 2015, notably Salix, which closed April 1, 2015.
Financial performance and liquidity
| Metric | Q1 2016 | Prior comparable period |
|---|---|---|
| Revenue | $2.372 billion | $2.170 billion, restated |
| Operating income | $66.2 million | $571.0 million |
| Net income (loss) attributable to Valeant | $(373.7) million | $97.7 million, restated |
| Diluted earnings (loss) per share | $(1.08) | $0.28, restated |
| Cash from operating activities | $558.1 million | $491.1 million |
| Cash and cash equivalents at period-end | $1.310 billion | $1.864 billion |
- Revenue grew 9%, but management attributed the increase principally to $572 million of incremental sales from 2015 acquisitions. Excluding acquisitions, foreign exchange and divestitures/discontinuations, sales from the remainder of the existing business declined $289 million.
- Operating expenses rose 44% to $2.305 billion. Amortization and impairment of finite-lived intangible assets increased 90% to $694.5 million; SG&A increased 42% to $812.6 million; R&D increased 85% to $103.1 million.
- Gross product sales were $3.936 billion, with deductions of $1.600 billion, or 41% of gross sales, versus 31% in Q1 2015. Net product sales were $2.336 billion.
- Long-term debt, including current maturities, was $31.979 billion at March 31, up from $31.088 billion at year-end. The current portion was $675.1 million. Cash and current debt figures should be considered alongside the company’s substantial debt-service obligations.
- Management reported liquidity sources including cash, operating cash generation and revolving-credit availability, and stated they were expected to meet liquidity needs for the next 12 months and beyond. Contractual debt payments, including interest, totaled $41.855 billion; $1.865 billion was scheduled for 2016.
Material changes versus the prior period
- Revenue increased, but segment profit fell 62% to $277.9 million; Developed Markets profit declined to $259.6 million from $667.7 million, and Emerging Markets profit to $18.3 million from $54.6 million. Acquisition-related amortization, weak legacy product trends and currency pressure weighed on results.
- Interest expense rose 43% to $426.6 million, primarily reflecting debt incurred for acquisitions. The company reported a net loss despite higher reported revenue.
- Operating cash flow increased 14%. Investing cash use was $112.0 million, compared with $11.241 billion in Q1 2015, which included restricted cash associated with the Salix financing. Financing cash provided was $259.2 million, versus $12.306 billion in the prior period, which included major acquisition financing and an equity issuance.
- Management said approximately $530 million of annualized Salix cost synergies had been substantially achieved by year-end 2015; estimated total related integration and restructuring costs were approximately $300 million, of which $238 million had been incurred by March 31, 2016.
Outlook, risks, contingencies and unusual items
- Management described 2016 priorities as growing key dermatology, gastrointestinal and eye-health businesses; advancing product launches and regulatory approvals; transitioning products to Walgreens fulfillment arrangements; and reducing debt. The filing gives no clear numeric revenue or earnings guidance. Management cited a reduced 2016 forecast and performed an updated goodwill impairment test; it reported no goodwill impairment as of March 31, 2016, but warned that further forecast changes could lead to impairment.
- The April 2016 credit-agreement amendment increased borrowing costs by 1 percentage point until delivery of the quarter ending June 30, 2017 statements, changed the interest-coverage covenant and imposed restrictions on acquisitions, debt-funded acquisitions and certain investments and distributions until specified leverage/reporting conditions are met. The company said it expected to remain in covenant compliance, while warning that weaker results could jeopardize compliance.
- The company restated prior-period financial statements, principally for Philidor-related revenue recognition. The Q1 2015 restatement reduced revenue by approximately $21 million and increased Valeant-attributable net income by approximately $24 million, or $0.07 per diluted share. Management, the Audit and Risk Committee and the Board had concluded prior financial statements for specified 2014 and 2015 periods should no longer be relied upon.
- Material weaknesses in internal control over financial reporting persisted, including weaknesses related to tone at the top and non-standard revenue transactions. Disclosure controls were deemed ineffective as of March 31, 2016. Remediation efforts were underway, including new leadership, training and third-party reviews.
- The filing describes multiple government inquiries and litigation concerning Philidor, pricing, distribution, marketing, disclosures and accounting, as well as other investigations and class actions. Outcomes and potential losses were generally not predictable; the Texas Medicaid matter included a $20 million demand that the company was evaluating.
- CEO Joseph Papa assumed the Chairman and CEO roles on May 2, 2016. The company introduced a Patient Access and Pricing Committee and an enhanced hospital rebate program for Nitropress and Isuprel; it also stated there would be no further price increases on those products. Walgreens arrangements involved planned price reductions averaging approximately 10% for certain products, phased in over six to nine months.
- Unusual Q1 expenses included an $18.4 million loss on Philidor deconsolidation and approximately $37 million of former-CEO termination-related expense within SG&A, including share-based compensation and cash benefits.
Important facts for investors to verify
- Reconcile the restated comparative figures with the 2015 Form 10-K and track whether further accounting corrections or control deficiencies emerge.
- Monitor legacy-business sales, acquisition contributions, gross-to-net deductions, Walgreens pricing effects and the performance of key products, especially Addyi.
- Assess cash generation against debt maturities, interest costs, covenant requirements and the restrictions in the amended credit agreement.
- Follow the remediation of internal-control weaknesses, future filing timeliness and the resolution or financial impact of regulatory investigations and litigation.
- Check subsequent impairment testing and the progress, costs and realized benefits of restructuring, synergies and planned product launches.