Valeant Pharmaceuticals International, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. The filing is by Valeant Pharmaceuticals International, Inc. (the company later known as Bausch Health), not under the Bausch Health name. Amounts below are U.S. dollars.
Business context and reporting period
Valeant develops, manufactures and markets specialty pharmaceuticals, OTC products and medical devices, with a focus on eye health, dermatology, neurology and branded generics. It acquired Bausch & Lomb on August 5, 2013, and also completed acquisitions including Obagi, Natur Produkt and certain Eisai product rights. The Bausch & Lomb transaction was valued at $8.7 billion enterprise value and was financed with debt and equity. Valeant reported two segments: Developed Markets and Emerging Markets.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,541.7 million | $884.1 million | $3,705.8 million | $2,560.3 million |
| Operating income (loss) | $(891.5) million | $29.5 million | $(633.0) million | $177.8 million |
| Net income (loss) attributable to Valeant | $(973.2) million | $7.6 million | $(989.9) million | $(26.9) million |
| Diluted earnings (loss) per share | $(2.92) | $0.02 | $(3.13) | $(0.09) |
| Operating cash flow | $201.7 million | $166.8 million | $762.1 million | $588.7 million |
- Revenue and growth: Revenue rose 74% in Q3 and 45% for the nine-month period, principally due to acquired businesses. Management also reported growth in existing business, partly offset by generic-driven declines in several established products.
- Costs and margins: Cost of goods sold, excluding separately reported amortization and impairment, was 36% of Q3 revenue versus 24% a year earlier; for nine months it was 30% versus 25%. The filing attributes the increase largely to acquired-inventory accounting adjustments, product mix and lower sales of higher-margin products. Reported operating losses also reflect substantial amortization, impairment, restructuring and legal charges.
- Major charges: Q3 included a $551.6 million impairment of ezogabine/retigabine and a $93.8 million write-off of its modified-release research asset. Nine-month amortization and impairment expense was $1,540.0 million, compared with $629.4 million. Restructuring, integration and other costs were $295.9 million in Q3 and $398.5 million year to date.
- Cash flow: Nine-month operating cash flow was $762.1 million; capital spending was $51.7 million. Investing used $5,235.7 million, mainly for acquisitions. Financing provided $4,158.6 million, primarily reflecting acquisition-related borrowing and equity issuance.
- Liquidity and debt: At September 30, cash was $596.3 million, current assets $3,848.4 million and current liabilities $2,853.1 million. Long-term debt, including current maturities, was $17,404.7 million, up 58% from year-end 2012; reported net financial liabilities were $16,808.4 million. Management said existing cash and expected operating cash generation should meet current liquidity needs; the company was in compliance with debt covenants.
- Equity: Valeant issued shares for net proceeds of approximately $2.27 billion to help finance Bausch & Lomb. Shares outstanding were 332.8 million at quarter-end and 333.9 million as of October 29, 2013.
Material changes versus the prior comparable period
- Acquisitions materially expanded revenue and assets: total assets increased 57% to $28.2 billion, while intangible assets and goodwill grew substantially.
- Debt increased by $6.4 billion to $17.4 billion, and quarterly interest expense more than doubled to $249.3 million. Valeant issued $1.6 billion of 6.75% notes due 2018 and $1.625 billion of 7.50% notes due 2021, alongside incremental term loans.
- Despite higher reported revenue, the company moved from Q3 2012 operating income to a large operating loss, driven especially by impairment charges, acquisition-related costs and increased interest expense.
- Developed Markets recorded a Q3 segment loss of $328.6 million, compared with segment profit of $242.3 million a year earlier; Emerging Markets segment profit increased to $19.5 million from $18.8 million.
Outlook, commentary, risks and unusual items
- Synergies: Management expected annual Bausch & Lomb cost synergies exceeding $850 million by the end of 2014, with total related costs estimated at approximately half of those annual synergies. It expected approximately $300 million of annual Medicis synergies by the end of 2013, with integration costs below $250 million. These are estimates, not guarantees.
- Products and competition: Valeant anticipated continuing declines in Zovirax ointment revenue following generic entry and ongoing generic erosion for Retin-A Micro, BenzaClin and Cesamet. Management cited growth in core dermatology products and Emerging Markets sales.
- Pipeline and regulatory: FDA feedback on ezogabine/retigabine required labeling and risk-management changes and led GSK to eliminate U.S. sales-force promotion, driving impairment charges. Efinaconazole (Jublia) had received an FDA Complete Response Letter; the company then expected a 2014 launch, subject to addressing FDA issues.
- Legal matters: Valeant recognized a $142.5 million Q3 charge for an agreement with Anacor resolving disputes. The agreement was reached October 27, after quarter-end, and payment was due by November 8. New Solodyn antitrust class actions and an Allergan patent infringement action involving Restylane-L and Perlane-L were among disclosed proceedings. Outcomes and potential losses for various proceedings were not generally estimable.
- Other risks: The filing highlights substantial debt and debt service, floating-rate exposure, acquisition integration and synergy execution, generic competition, product safety and regulatory approvals, reimbursement and pricing, foreign exchange, and litigation. Management estimated that a 100-basis-point rate increase would add about $52.1 million to annualized pretax expense on variable-rate debt.
- Capital allocation: No dividends were declared; management said it did not intend to pay dividends in the foreseeable future. The filing provided no specific consolidated revenue or earnings guidance.
Important facts for investors to verify
- How much reported growth reflects acquired businesses versus organic growth, and how comparable results are after acquisition and inventory-accounting adjustments.
- Whether the projected Bausch & Lomb and Medicis synergies are achieved on schedule and at the estimated cost.
- Debt repayment capacity, refinancing needs, interest-rate sensitivity and liquidity after the Bausch & Lomb acquisition.
- The continuing sales and margin effects of generic competition, particularly for Zovirax, Retin-A Micro, BenzaClin and Cesamet.
- Whether additional impairments, pipeline delays, regulatory decisions or litigation settlements could materially affect earnings and cash flow.
- The final acquisition-date valuations for Bausch & Lomb and other acquired businesses; the filing states that some purchase accounting amounts remained provisional.