Valeant Pharmaceuticals International, Inc. — Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing is by Valeant Pharmaceuticals International, Inc. (the company identified in the request as Bausch Health Companies Inc.); amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Valeant was a multinational specialty pharmaceutical and medical-device company operating in more than 100 countries, with Developed Markets and Emerging Markets segments. Results include Bausch & Lomb (acquired August 2013) and 2014 acquisitions including Solta Medical, so year-over-year growth reflects acquisitions as well as underlying performance.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $2,041.1 million | $1,095.7 million | $3,927.3 million | $2,164.1 million |
| Operating income | $355.1 million | $141.5 million | $711.7 million | $258.5 million |
| Operating margin | 17.4% | 12.9% | 18.1% | 11.9% |
| Net income (loss) attributable to Valeant | $125.8 million | $10.8 million | $103.2 million | $(16.7) million |
| Diluted EPS | $0.37 | $0.03 | $0.30 | $(0.05) |
| Operating cash flow | $376.0 million | $305.1 million | $860.3 million | $560.4 million |
- Revenue rose 86% in Q2 and 81% in the first half. Management attributed most of the increase to acquired businesses; excluding acquisitions and other identified effects, existing-business product sales grew $94.8 million in Q2 and $185.0 million in the first half.
- Q2 cost of goods sold was 28% of revenue, versus 26% a year earlier; first-half ratio was 27%, versus 26%. Management cited acquired-product mix and generic erosion in higher-margin products, partly offset by manufacturing efficiencies.
- Operating expenses were $1,686.0 million in Q2 and $3,215.6 million in the first half. They included $142.1 million and $275.7 million, respectively, of restructuring, integration and other costs, and $365.6 million and $720.8 million of intangible amortization and impairments.
- Interest expense was $241.2 million in Q2 and $487.7 million in the first half, up from $176.8 million and $332.1 million, mainly reflecting debt associated with the Bausch & Lomb acquisition. First-half results also included a $93.7 million loss on debt extinguishment.
- Cash from operations was $860.3 million in the first half; investing activities used $650.5 million and financing activities used $279.3 million. Capital expenditures were $171.6 million, leaving operating cash flow less capital expenditures of $688.7 million before acquisitions and other investing or financing needs.
- At June 30, cash was $531.2 million, current assets $5,163.7 million, and current liabilities $2,496.3 million. Total debt, including current maturities, was $17,325.5 million; cash less debt implies net debt of about $16.8 billion. Debt fair value was reported as $18.2 billion.
- Valeant reported compliance with its debt covenants. Its debt agreements include financial and other covenants. Variable-rate debt was $7.8 billion; management estimated that a 100-basis-point rate increase would add approximately $50.8 million to annual pretax expense and cash flows.
Material changes versus the prior comparable period
- Acquisitions drove much of the sharp increase in revenue and segment profit. Developed Markets revenue rose 85% in Q2 and 84% in the first half; Emerging Markets revenue rose 90% and 76%, respectively.
- Generic competition reduced sales of Retin-A Micro, Vanos, Zovirax and Wellbutrin XL in Canada. Management expected continued erosion. Foreign exchange, supply interruptions, discontinuations and lower facial-injectable sales also weighed on results.
- First-half operating cash flow increased 54% year over year, but cash declined $69.1 million from year-end to $531.2 million, reflecting acquisitions, capital spending, debt repayments and other uses.
- First-half 2013 included $2.3 billion of net common-stock issuance proceeds, making the year-over-year financing cash-flow comparison unusually large.
Outlook, commentary, risks and unusual items
- Management targeted more than $900 million in annual Bausch & Lomb cost synergies, expected by the end of 2014, and estimated related costs at approximately 60% of those synergies. Costs incurred through June 30, 2014 were $515.0 million. Management cautioned that integration and synergy realization involve uncertainty.
- In July 2014, Valeant sold Restylane, Perlane, Emervel, Sculptra and Dysport rights for approximately $1.4 billion cash; it expected about $50 million of selling costs. It also sold Metronidazole 1.3% rights, with an approximately $60 million loss expected in Q3 2014.
- Valeant acquired PreCision Dermatology in July for $475 million cash plus a potential $25 million sales milestone. The FTC required divestiture of certain PreCision tretinoin rights; those sales generated stated upfront proceeds of $70 million and $45 million, with additional contingent payments for one transaction.
- Valeant’s proposed Allergan transaction remained uncertain. Its latest proposal contemplated $72 cash plus 0.83 Valeant shares per Allergan share, subject to conditions and proration. Valeant had not signed a merger agreement with Allergan. A $20.35 billion financing commitment was obtained, subject to customary conditions; closing depended on shareholder, regulatory and other conditions.
- Material risks include substantial debt and debt service, floating-rate exposure, acquisition integration, generic competition, product and patent challenges, regulatory and product-liability matters, and foreign exchange and geopolitical uncertainty. The filing describes multiple legal proceedings and investigations; some outcomes and potential losses could not be reasonably estimated.
- Management said disclosure controls and procedures were effective as of June 30, 2014, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much revenue and operating cash flow came from acquired businesses versus organic growth, and whether underlying growth can offset generic erosion.
- Progress toward the more than $900 million Bausch & Lomb synergy target, remaining integration costs, and the effect of the Waterford plant restructuring.
- Debt repayment capacity, refinancing needs, interest-rate sensitivity, covenant headroom and liquidity after acquisitions and the Allergan proposal.
- Actual proceeds, costs and earnings effects of the July asset sales, including the expected Metronidazole loss and the use of proceeds.
- Status, financing terms, dilution and closing conditions of the proposed Allergan transaction; the filing provides no assurance it would be completed.
- Developments in material litigation, regulatory inquiries, generic challenges and contingent liabilities; potential outcomes are not clear or quantifiable from the filing text.