Biovail Corporation 10-Q Summary
Issuer note: The supplied filing is for Biovail Corporation, not Bausch Health Companies Inc. It covers the quarter ended June 30, 2010; financial statements are unaudited and amounts are in U.S. dollars.
Business context and reporting period
Biovail was a specialty pharmaceutical company focused on specialty CNS products, alongside branded and generic medicines. The filing compares the three and six months ended June 30, 2010 with the corresponding 2009 periods. Valeant’s results are not included because the proposed merger had not closed.
Financial performance and condition
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Revenue | $238.8m | $193.5m | $458.4m | $366.9m |
| Operating income | $48.8m | $10.5m | $65.2m | $64.2m |
| Net income | $34.0m | $24.1m | $30.8m | $63.1m |
| Diluted EPS | $0.21 | $0.15 | $0.19 | $0.40 |
| Operating cash flow | $108.9m | $97.1m | $153.7m | $144.1m |
- Q2 operating margin was approximately 20.4%, versus 5.4% a year earlier; H1 operating margin was approximately 14.2%, versus 17.5%. Revenue grew 23% in Q2 and 25% in H1.
- Cash and equivalents were $176.6m at June 30, up from $114.5m at December 31, 2009. Working capital was $180.2m, compared with $93.7m.
- Long-term obligations, including current portion, were $319.2m: $302.9m carrying value of convertible notes and $16.3m Cambridge obligation. No borrowings were outstanding under the $410m revolving facility; the company reported covenant compliance.
- H1 investing cash outflow was $53.2m, including $60.2m of upfront payments for acquired or licensed product rights; financing cash outflow was $38.2m, including $28.5m of dividends and a $12.5m Cambridge payment.
Material changes versus prior periods
- Sales gains reflected the full U.S. commercialization rights to Wellbutrin XL, higher Xenazine sales and expanded geographic sales, and elevated demand for generic Tiazac and Cardizem CD amid competitors’ manufacturing issues. A stronger Canadian dollar also lifted reported revenue.
- Ultram ER revenue fell 59% in Q2 and 60% in H1 year over year following generic competition. Cardizem LA sales also declined following generic entry.
- Q2 net income rose 41%, helped by increased product contribution and lower acquired in-process R&D charges than in Q2 2009. H1 net income fell 51%, chiefly reflecting $61.2m of 2010 acquired in-process R&D charges, higher intangible amortization and interest expense, and the absence of a $22m 2009 auction-rate-security settlement gain.
- H1 R&D expense rose 76% to $104.1m, including acquired in-process R&D and increased internal CNS program spending. Amortization expense rose 79% to $66.6m, largely due to acquired Wellbutrin XL and tetrabenazine intangibles.
- Cash dividends declared were $0.095 per share in Q2 and $0.185 per share in H1; H1 2009 included a higher earlier dividend policy.
Outlook, commentary, risks and unusual items
- Proposed Valeant merger: Announced June 20, 2010, with closing expected before year-end, subject to shareholder approvals, financing, regulatory approvals and other conditions. FTC early termination of the U.S. antitrust waiting period was granted July 22. The merger financing commitment included $500m term loan A, up to $2.272bn term loan B and a $250m revolver. A proposed $1.00 post-merger special dividend was contemplated, after which the combined company did not intend to pay dividends. The company projected at least $175m annual operating savings by the second year and $130m–$150m of merger-related restructuring and integration costs.
- Merger-related restrictions limit certain acquisitions, in-licensing, share repurchases and additional borrowing without Valeant’s consent. Termination fees of up to $100m may apply in specified circumstances. Valeant shareholder lawsuits sought to enjoin or rescind the transaction; outcomes were uncertain.
- Management expected 2010 capital expenditures of approximately $10m and stated that cash from operations and available credit were expected to meet needs for at least 12 months. This outlook is subject to business development needs, legal outcomes and credit-market access.
- The company expected about $10m in second-half 2010 costs to establish a U.S. specialty sales force for Staccato loxapine, followed by $40m–$70m in 2011 depending on the FDA label. The FDA’s stated goal date for the Staccato loxapine application was October 11, 2010. Istradefylline had previously received an FDA “not approvable” letter; Biovail intended to seek FDA guidance on resubmission.
- Biovail cancelled Phase 3 trials for BVF-324 because enrollment was slower than expected and commercial interest was lacking; it accrued $2.8m for termination obligations. Puerto Rico manufacturing consolidation and the Carolina facility closure were planned, with shutdown timing affected by higher-than-expected generic product demand.
- U.S. healthcare reform had no material reported effect in Q2 or H1, but increased Medicaid rebates and other provisions were in effect or scheduled to take effect; management said implementation details remained uncertain and could adversely affect reimbursement and results.
- Other notable exposures include ongoing antitrust, intellectual-property and other legal proceedings; potential generic competition, including the possibility of adverse Cardizem CD effects; and auction-rate securities with $26.8m principal but only $6.0m estimated fair value, based on significant unobservable inputs.
Important facts for investors to verify
- Confirm the issuer and filing match the intended company: this is Biovail’s 2010 Q2 10-Q, not a Bausch Health filing.
- Track merger approvals, financing conditions, litigation, closing timing, debt raised and the actual realization and cost of projected synergies.
- Assess the sustainability of sales growth, especially demand tied to competitors’ supply disruptions, and generic erosion in Ultram ER, Cardizem LA and other products.
- Review pipeline regulatory and clinical milestones, launch spending, contingent milestone and royalty obligations, and the effect of acquired R&D charges on reported earnings.
- Monitor liquidity, convertible-note repayment or settlement terms, legal contingencies, auction-rate-security valuation and healthcare-reform impacts.