Valeant Pharmaceuticals International, Inc. (now Bausch Health Companies Inc.) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are U.S. dollars; financial statements are unaudited. The filing registrant’s name at the time was Valeant Pharmaceuticals International, Inc.
Business context and financial performance
The company was a multinational specialty pharmaceutical and medical-device business operating in more than 100 countries, with Developed Markets and Emerging Markets segments. Results were significantly affected by the 2013 Bausch & Lomb acquisition and 2014 acquisitions of Solta Medical and PreCision, as well as divestitures and integration activity.
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Revenue | $2,056.2 million | $1,541.7 million | $5,983.5 million | $3,705.8 million |
| Operating income (loss) | $683.9 million | $(891.5) million | $1,395.6 million | $(633.0) million |
| Net income (loss) attributable to Valeant | $275.4 million | $(973.2) million | $378.6 million | $(989.9) million |
| Diluted EPS | $0.81 | $(2.92) | $1.11 | $(3.13) |
| Operating cash flow | $618.7 million | $201.7 million | $1,479.0 million | $762.1 million |
- Revenue rose 33% in Q3 and 61% in the first nine months. Acquisitions contributed substantially; the company also reported growth in its existing business. Generic competition, divestitures/discontinuations, supply interruptions and foreign exchange partly offset growth.
- Q3 cost of goods sold, excluding intangible amortization and impairments, was 27% of revenue versus 36% a year earlier. SG&A was 25% of revenue versus 23%. The filing does not present a single consolidated operating-margin measure adjusted for unusual items.
- Reported earnings improved sharply from prior-year losses, but comparisons include substantial prior-year impairment charges and current-period divestiture gains and other unusual items.
Financial position, liquidity and debt
- At September 30, 2014, cash and cash equivalents were $808.8 million, total assets $27.1 billion, and total liabilities $21.8 billion.
- Total debt, including current maturities, was $16.3 billion, down from $17.4 billion at December 31, 2013. Current debt was $690.6 million. Q3 included approximately $1.1 billion of principal payments. The company reported compliance with its debt covenants.
- Nine-month operating cash flow was $1.5 billion. Investing activities provided $105.8 million, including proceeds from asset sales that largely offset acquisition spending; financing activities used $1.4 billion, primarily reflecting debt repayments. Cash increased $208.5 million from year-end.
- Management stated existing cash and operating cash generation should meet current liquidity needs, including short-term maturities. The company also noted approximately $100 million of property-and-equipment commitments and that future acquisitions, including Allergan, could require additional financing or asset sales.
- Floating-rate debt was approximately $6.7 billion. Management estimated that a 100-basis-point increase in rates would add about $43.8 million to annualized pretax expense and cash flow, based on then-current borrowings and rates.
Material changes, outlook and unusual items
- Portfolio changes: Acquired Solta Medical in January and PreCision Dermatology in July. Sold filler and toxin assets to Galderma for approximately $1.4 billion in cash, recording a $323.9 million net gain. Other 2014 divestitures included Metronidazole 1.3% and FTC-required tretinoin product rights.
- Integration and synergies: Management expected more than $900 million of annual run-rate cost synergies from the Bausch & Lomb integration, substantially achieved by year-end 2014, with estimated related costs of approximately $600 million. Through September 30, the company had incurred $554.6 million of B&L-related costs. Medicis integration initiatives had generated over $300 million of run-rate synergies as of year-end 2013; additional costs were expected over the next six months.
- Allergan proposal: Valeant was pursuing a proposed combination with Allergan, with a proposal including $72 cash and 0.83 Valeant shares per Allergan share, subject to conditions and proration. No merger agreement had been signed, and completion was uncertain. The company had a $20.35 billion financing commitment, subject to conditions, and litigation and shareholder-approval processes were ongoing.
- Unusual items: Q3 other income included the $323.9 million Galderma divestiture gain; it was partly offset by a $58.5 million loss on the Metronidazole sale, a $20.4 million PreCision-related stock-option acceleration expense and other charges. Nine-month results also included a $50 million reversal of a prior AntiGrippin litigation reserve. Q3 tax expense included $97.2 million related to the Galderma transaction.
- Risks and contingencies: Risks highlighted include generic competition, acquisition integration and synergy execution, substantial debt and interest-rate exposure, foreign exchange, product and supply issues, regulatory and patent challenges, and litigation. Solodyn antitrust actions and product/patent matters remained pending; the company said some legal outcomes and potential losses could not be reasonably estimated. A Russian AntiGrippin damages case was remanded for further proceedings, with potential damages not estimable.
- Product and sales trends: Management cited launches including Jublia, Luzu and Retin-A Micro 0.08% as growth contributors, while warning of continuing generic erosion in Vanos and Wellbutrin XL Canada. Management expected the rate of erosion to moderate and these products to become a smaller share of revenue as other businesses grew.
Important facts for investors to verify
- How much reported revenue and earnings growth reflects acquired businesses versus organic growth, and whether the expected B&L synergies were achieved at the projected cost.
- The sustainability of cash generation and debt reduction, including the impact of interest expense, floating-rate borrowings and upcoming maturities.
- The composition and repeatability of earnings after excluding divestiture gains, impairment charges, acquisition-accounting effects, restructuring costs and tax items.
- The eventual outcome, financing, approvals, litigation and shareholder process for the proposed Allergan transaction; it was not agreed or assured at the filing date.
- Developments in generic competition, product launches, supply interruptions, and material litigation or regulatory matters, particularly Solodyn and AntiGrippin.