Business context and reporting period
This is Valeant Pharmaceuticals International, Inc.’s Form 10-K for the fiscal year ended December 31, 2010, filed February 28, 2011—not a filing under the name Bausch Health Companies Inc. Biovail acquired Valeant on September 28, 2010, then changed its name to Valeant. Biovail was the accounting acquirer, so 2010 results include Valeant only from the merger date; comparisons with 2009 are therefore not like-for-like.
The combined specialty pharmaceutical company focuses on neurology, dermatology, branded generics and OTC products across North America, Europe, Latin America and Australia. Its five reporting segments are U.S. Neurology and Other, U.S. Dermatology, Canada and Australia, Branded Generics—Europe, and Branded Generics—Latin America.
Key financial metrics
Amounts below are in U.S. dollars; annual financial statement amounts are in millions unless otherwise indicated.
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $1,181.2 | $820.4 |
| Operating income (loss) | $(110.1) | $181.2 |
| Net income (loss) | $(208.2) | $176.5 |
| Diluted earnings (loss) per share | $(1.06) | $1.11 |
| Cash from operating activities | $263.2 | $360.9 |
| Cash and cash equivalents at year-end | $394.3 | $114.5 |
| Working capital at year-end | $327.7 | $93.7 |
| Long-term debt, including current portion | $3,595.3 | $326.1 |
| Total assets at year-end | $10,795.1 | $2,059.3 |
Reported operating margin was approximately negative 9.3% in 2010. Gross margin, calculated from revenue less cost of goods sold and cost of services, was approximately 65.6%; this was affected by acquisition accounting and product mix. The company reported a $28.1 million income-tax recovery, including significant valuation-allowance movements.
Fourth-quarter 2010 revenue was $514.6 million, operating loss was $49.0 million, net loss was $31.1 million, and operating cash flow was negative $1.4 million. Fourth-quarter 2009 revenue was $241.1 million and net income was $73.0 million.
Material changes versus the prior comparable period
- Revenue rose 44% year over year, primarily because $274.6 million of Valeant revenue was included after the merger. The 2010 result is not a full-year combined-company comparison.
- The company swung from net income of $176.5 million to a net loss of $208.2 million. Major 2010 charges included $140.8 million of restructuring and other costs, $89.2 million of acquired in-process R&D, $52.6 million of legal settlements, $38.3 million of merger transaction costs, and a $32.4 million debt-extinguishment loss. Amortization rose to $219.8 million, including amortization of acquired intangibles.
- Operating cash flow declined 27% to $263.2 million, with merger-related restructuring and legal settlement payments among the stated factors.
- Year-end debt rose substantially following the merger and related financing. Net financial liabilities were $3.19 billion, compared with $190.5 million at year-end 2009.
- Segment profit totaled $366.7 million, down 10% from $406.6 million. U.S. Dermatology segment profit declined 46%; Canada and Australia and Europe branded generics segment profits increased. Latin America recorded a segment loss of $3.9 million.
Outlook, management commentary, risks and unusual items
- Management targeted more than $310 million in annual cost synergies by the end of 2012, including $270 million expected in 2011; it reported more than $50 million achieved in fourth-quarter 2010. Estimated integration and rationalization costs were $135–$180 million. Management expected a combined cash tax rate below 10% for 2011.
- Management said existing cash, operating cash generation and available credit were expected to meet liquidity needs. It also noted that acquisitions may require additional debt, equity or asset sales. At year-end, the company was in compliance with credit-facility covenants. Its stated short-term debt maturities included $100 million of Term Loan A principal payable in quarterly installments.
- Key risks include integration execution and realization of synergies; high leverage, debt service and restrictive covenants; generic competition and limited patent protection; regulatory approval and pipeline development; product safety and liability; manufacturing and supply continuity; foreign exchange and interest rates; tax uncertainty; and ongoing litigation and compliance obligations.
- The FDA issued a Complete Response Letter for ezogabine in November 2010, citing non-clinical issues; the company said it was working toward a response in 2011. European regulators recommended marketing authorization for retigabine in January 2011. Several acquired or legacy development programs were terminated or suspended, with associated write-offs and settlement costs.
- Subsequent to year-end, the company issued $650 million of 6.75% notes due 2021 to help fund acquisitions; completed the U.S. Zovirax rights acquisition for a stated $300 million payment covering U.S. and Canadian rights; and agreed to acquire PharmaSwiss for €350 million plus potential contingent consideration. These were not year-end operating results. It also agreed to repurchase 7.4 million shares from ValueAct for $275 million, subject to closing conditions.
- The $1.00-per-share post-merger special dividend totaled $297.6 million in cash. Management stated it did not intend to pay dividends in the foreseeable future. The company also repurchased $126.3 million principal amount of convertible notes for $259.2 million, plus 2.3 million shares for $60.1 million, during 2010.
- Goodwill and acquired intangible values were provisional, with goodwill impairment testing for the acquired business scheduled to begin in 2011. Management’s internal-control assessment excluded Valeant operations, which represented 23% of 2010 consolidated revenue; the auditor’s internal-control opinion likewise excluded those operations.
Important facts for investors to verify
- How much of reported growth and subsequent results reflects the acquired Valeant business, and what a full-year combined-company comparison shows.
- Whether merger integration delivers the stated synergy targets, and whether total integration costs remain within the $135–$180 million estimate.
- Debt balances, maturities, variable-rate exposure, covenant headroom and cash available after acquisitions, repurchases and integration spending.
- Final purchase-price allocations, acquired intangible useful lives, and the outcome of goodwill and IPR&D impairment assessments.
- Progress on ezogabine/retigabine and dermatology pipeline approvals, plus the financial impact of discontinued programs and generic competition.
- Resolution and potential exposure from legal proceedings, tax audits and uncertain tax positions; the filing does not clearly quantify potential losses for many matters.
- Completion, final funding and economics of the announced PharmaSwiss, Zovirax and ValueAct transactions.