Bausch Health Companies Inc. annual report, FY2014

Business context and reporting period

This is Valeant Pharmaceuticals International, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed February 25, 2015—not a filing under the name Bausch Health Companies Inc. Valeant was a multinational specialty pharmaceutical and medical-device company operating in more than 100 countries, with Developed Markets and Emerging Markets segments. Its portfolio included Bausch & Lomb, acquired in 2013. Unless otherwise stated, amounts below are U.S. dollars.

Financial performance and position

• Revenue rose 43%; acquisitions accounted for much of the increase. Developed Markets generated $6.167 billion (up 44%) and Emerging Markets $2.096 billion (up 42%).
• Operating margin was approximately 24.7% in 2014, compared with an operating loss in 2013. Reported 2014 results included significant gains and other unusual items; see below.
• Cost of goods sold was 27% of revenue, down from 32% in 2013. Selling, general and administrative expense rose to $2.026 billion, or 25% of revenue, from $1.305 billion, or 23%. Research and development expense increased to $246.0 million from $156.8 million.
• Interest expense increased to $971.0 million from $844.3 million. The company reported $129.6 million of losses on extinguishment of debt.
• Year-end debt declined 12%, mainly through term-loan repayments and redemptions of senior notes. Cash fell 46%. The company reported $2.295 billion of operating cash flow and $291.6 million of capital expenditures.
• Fourth-quarter revenue was $2.280 billion, operating income $644.1 million, net income attributable to Valeant $534.9 million, and operating cash flow $815.7 million. The comparable 2013 quarter reported revenue of $2.064 billion, operating income of $223.5 million, net income of $123.8 million, and operating cash flow of $279.9 million.

Material changes and unusual items

• 2014 revenue growth included $2.280 billion of incremental product sales attributed collectively to 2013 and 2014 acquisitions. Growth from the remainder of the existing business was partly offset by $322.8 million of effects from divestitures, discontinuations and supply interruptions, and $164.5 million of foreign-exchange impacts.
• Net income improvement versus 2013 reflected higher product contribution and lower impairment charges, as well as gains from asset and investment transactions. 2013 included a $551.6 million impairment of ezogabine/retigabine and a $93.8 million write-off of its modified-release development asset.
• 2014 other income included a $323.9 million gain on the sale of facial aesthetic fillers and toxins, a reversal of a $50 million AntiGrippin litigation reserve, and other items. The divestiture generated approximately $1.4 billion in cash proceeds. Net income also benefited from a $286.7 million net gain associated with the sale of Allergan shares through PS Fund 1.
• Acquisition integration and restructuring costs remained substantial: $381.7 million in 2014. Valeant said Bausch & Lomb cost synergies of more than $900 million on an annual run-rate basis were substantially achieved by year-end; estimated related costs were approximately $600 million, excluding specified charges.
• Product-sales deductions rose to 30% of gross sales from 28%; gross-to-net provisions totaled $3.490 billion. Management cited higher rebates and returns, including co-pay programs for launches, and a greater mix of products with higher rebate rates.

Outlook, risks and contingencies

• The filing does not provide a clear quantified revenue or earnings forecast. Management described continued growth initiatives, product launches and acquisition opportunities, while noting that generic erosion and currency movements could offset growth.
• Valeant expected the proposed Salix acquisition, announced in February 2015, to close in the second quarter of 2015, subject to conditions. The announced enterprise value was approximately $14.5 billion; financing would require substantial additional borrowing. Expected synergies and integration benefits were uncertain.
• Management identified substantial indebtedness and debt service, refinancing and interest-rate exposure, acquisition integration, generic competition, product approvals and safety, litigation, foreign exchange, tax and reimbursement/pricing pressures as significant risks. A 100-basis-point increase in rates was estimated to raise annual pretax expense on variable-rate debt by approximately $43.8 million.
• Valeant self-insured substantially all product-liability risk for claims arising after March 31, 2014. It also disclosed ongoing litigation and regulatory matters, including Solodyn antitrust claims, Allergan-related securities cases, patent disputes and an AntiGrippin matter with damages not then estimable. The filing states that outcomes of certain proceedings could be material.
• McKesson represented 17% of 2014 revenue and AmerisourceBergen 10%, creating customer concentration. The company also disclosed reliance on some single-source suppliers and sensitivity to foreign currencies, including the Russian ruble.
• Management and the auditor reported effective internal control over financial reporting as of year-end. The company remained subject to a Corporate Integrity Agreement, with requirements expected to terminate by the end of the second quarter of 2015.

Important facts for investors to verify

1. Reconcile reported earnings and operating cash flow to recurring performance, particularly the Allergan investment gain, divestiture gains, tax effects, acquisition accounting and restructuring charges.
2. Review debt maturities, covenant restrictions, interest costs and the financing terms and closing status of the proposed Salix transaction; the filing’s year-end figures predate subsequent 2015 financing actions.
3. Assess the size and assumptions behind gross-to-net sales provisions, especially rebates, returns and chargebacks, and monitor whether these estimates change.
4. Evaluate exposure to generic launches and patent outcomes for key products, alongside pipeline progress and the commercial contribution of newer launches.
5. Check developments in material litigation, regulatory investigations, product-liability exposure and the Corporate Integrity Agreement.