Bausch Health Companies Inc. (then Valeant Pharmaceuticals International, Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 8, 2018. Figures are in U.S. dollars. The company announced it would change its name to Bausch Health Companies Inc. in July 2018.
Business context
The company develops and sells branded, generic and over-the-counter pharmaceuticals and medical devices, with management prioritizing eye health, gastrointestinal (GI) and dermatology businesses. Q1 segment results use the then-current reporting structure; Solta was reassigned to Branded Rx effective in Q1, and a four-segment structure was planned for Q2.
Financial highlights
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $1.995 billion | $2.109 billion; down 5% |
| Organic revenue growth (non-GAAP) | Up 2% | Excludes currency effects and specified divestitures, acquisitions and discontinuations |
| Operating income (loss) | $(2.281) billion | $211 million |
| Net income (loss) attributable to the company | $(2.693) billion | $628 million |
| Diluted earnings (loss) per share | $(7.68) | $1.79 |
| Cash from operations | $438 million | $954 million |
| Cash and cash equivalents at quarter end | $909 million | $720 million at December 31, 2017 |
| Long-term debt, net of discounts and costs | $25.268 billion | $25.444 billion at December 31, 2017 |
- Revenue and segments: Management attributed the revenue decline principally to 2017 divestitures and discontinuations and lower volumes from loss of exclusivity, partly offset by $66 million of favorable foreign exchange and $51 million of improved realized pricing. Organic revenue rose 2%. Bausch + Lomb/International revenue was $1.103 billion (down 3%); Branded Rx was $593 million (down 6%); U.S. Diversified Products was $299 million (down 14%). GI revenue within Branded Rx increased 40% to $422 million, while Ortho Dermatologics revenue fell 42% to $112 million.
- Profitability and margins: Cost of goods sold was 28% of product sales in both periods. Segment profit was $853 million, or 43% of revenue, versus $923 million, or 44%, a year earlier. Q1 2018 results included a $2.213 billion goodwill impairment charge: $1.970 billion for Salix and $243 million for Ortho Dermatologics. Amortization was $743 million, versus $635 million.
- Cash flow: Investing activities used $48 million; financing activities used $288 million. Operating cash flow was lower year over year, in part due to $170 million of payments for legal settlements and less favorable changes in operating assets and liabilities.
- Debt and liquidity: Gross contractual debt principal was $25.567 billion. The weighted-average stated interest rate was 6.32%, up from 6.07% at year-end. The company reported $1.081 billion of remaining revolver availability at March 31, after $250 million of borrowings and $169 million of letters of credit. It was in compliance with financial maintenance covenants and expected to remain compliant over the next 12 months. Management expected approximately $1.3 billion of interest payments and $220 million of capital expenditures for the remainder of 2018.
Material changes and unusual items
- Revenue fell 5% reported, but grew 2% organically; management cited divestitures, discontinuations and generic competition as headwinds. GI growth, especially Xifaxan, partly offset declines elsewhere.
- The reported loss was dominated by the goodwill impairment. Q1 2017 comparability was also affected by a $319 million gain on the skincare-brand sale and a $924 million income-tax benefit. Q1 2018 had only a $3 million income-tax benefit.
- In March, the company issued $1.5 billion of 9.25% unsecured notes due 2026 and used part of the proceeds to repurchase $1.454 billion of nearer-dated unsecured notes. This extended maturities but raised the weighted-average stated interest rate.
- New revenue guidance adopted January 1, 2018 did not materially change the timing of product-sale revenue recognition. The company also recorded a $1.209 billion cumulative-effect adjustment to increase deferred tax assets and reduce opening accumulated deficit following adoption of intra-entity tax-transfer guidance.
Outlook, management commentary and risks
- Management said cash on hand and expected operating cash flows should meet near-term liquidity needs and debt service, and that scheduled mandatory principal repayments were substantially eliminated through March 2020. These are forward-looking expectations, not guarantees.
- Management expected 2018 R&D expense to exceed 4% of revenue. It described the “Significant Seven” products as a potential growth driver over the next five years, but reported their 2017 revenue was below $100 million and did not provide a quantified forecast.
- Management highlighted substantial uncertainty from generic competition and loss of exclusivity, product approvals and launches, pricing and reimbursement pressure, and the execution of its turnaround. Several products faced potential loss of exclusivity in 2018–2022.
- Salix and Ortho Dermatologics goodwill fair values only marginally exceeded carrying values after impairment testing; management said further impairment charges could be material if conditions worsen or plans are not achieved.
- Legal and regulatory exposure remains significant, including U.S. and Canadian securities litigation, investigations related to pricing, distribution and Philidor, contact-lens antitrust litigation, and other product, patent and commercial disputes. Accrued loss contingencies were $108 million at quarter end; the company stated it could not estimate losses for many other matters.
- Other uncertainties include substantial debt and covenant constraints, interest-rate exposure, foreign exchange, tax assessments and provisional Tax Act accounting. A 100-basis-point increase in rates was estimated to increase annual pre-tax interest expense by approximately $36 million on current variable-rate borrowings.
Most important facts for investors to verify
- Whether organic growth and GI performance persist and offset erosion from generic competition, divestitures and declining dermatology sales.
- Whether cash generation, revolver access and covenant compliance remain adequate given debt of $25.567 billion gross principal and significant interest obligations.
- Whether Salix and Ortho Dermatologics avoid additional goodwill impairment and whether planned product launches and approvals meet expectations.
- How pending litigation, investigations, settlements, tax audits and insurance recoveries affect future cash flows and liabilities.
- How much reported earnings and balance-sheet movement reflects non-cash impairment and accounting changes rather than underlying operating performance.