Bausch Health Companies Inc. (filed as Valeant Pharmaceuticals International, Inc.) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Unless stated otherwise, amounts are U.S. dollars. The filing reports the company under its then-current name, Valeant Pharmaceuticals International, Inc.; the requested company name is a later corporate identity.
Business context and reporting period
The company was a multinational specialty pharmaceutical and medical-device business, operating in more than 100 countries. Its three reportable segments were Bausch + Lomb/International, Branded Rx, and U.S. Diversified Products. Management shifted in 2016 from acquisition-led expansion toward focusing on core eye-health, gastrointestinal and dermatology businesses, investing in selected R&D, divesting non-core assets and reducing debt.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $9.674 billion | $10.447 billion |
| Operating income (loss) | $(566) million | $1.527 billion |
| Net income (loss) attributable to Valeant | $(2.409) billion | $(292) million |
| Diluted loss per share | $(6.94) | $(0.85) |
| Operating cash flow | $2.087 billion | $2.257 billion |
| Cash and cash equivalents at year-end | $542 million | $597 million |
| Long-term debt, including current portion | $29.846 billion | $31.088 billion |
| Working capital | $1.468 billion | $194 million |
FY 2016 operating expenses included $1.077 billion of goodwill impairment, $2.673 billion of intangible-asset amortization and $422 million of asset impairments. Interest expense was $1.836 billion, up $273 million year over year. The company’s reported gross product sales were reduced by $6.511 billion in discounts, returns, rebates, chargebacks and distribution fees; these provisions equaled 41% of gross product sales, versus 34% in 2015. Cost of goods sold excluding amortization and impairment was 27% of revenue, versus 24%.
Segment results: Bausch + Lomb/International revenue was $4.607 billion and segment profit $1.356 billion; Branded Rx revenue was $3.148 billion and segment profit $1.644 billion; U.S. Diversified Products revenue was $1.919 billion and segment profit $1.522 billion. Segment profit is a company-defined measure that excludes significant items and is not equivalent to operating income.
Fourth quarter: Revenue was $2.403 billion, down 13% from $2.758 billion; operating income was $151 million, down 10%; attributable net loss was $515 million versus $385 million; and operating cash flow was $513 million versus $598 million.
Liquidity and debt: The company repaid approximately $1.268 billion of long-term debt during 2016. Contractual obligations totaled $40.047 billion, including $38.976 billion of debt obligations including interest. Gross debt maturities were concentrated in 2018–2021, including $3.738 billion due in 2018, $2.122 billion in 2019 and $7.723 billion in 2020. Cash and operating cash flow support liquidity, but the company stated that compliance with debt covenants depended on forecasts, planned divestitures and potential cost actions.
Material changes versus the prior comparable period
- Revenue fell 7% year over year. Declines in existing-business sales, lower realized prices and volume, foreign-exchange effects, and divestitures outweighed acquisition contributions. Existing-business product sales declined $1.277 billion; acquisitions added $735 million in product sales.
- Existing-business contribution declined, with management attributing the decline principally to lower average realized pricing and lower volume. Segment profit fell 15%, to $4.522 billion from $5.346 billion.
- Operating results swung from $1.527 billion of operating income to a $566 million operating loss. Besides lower contribution and higher amortization, the change included $1.077 billion of goodwill impairment and increased SG&A and R&D.
- Net loss widened to $2.409 billion, reflecting the operating deterioration and higher interest expense. Operating cash flow declined 8% to $2.087 billion.
- Revenue provisions rose to 41% of gross product sales from 34%, including higher rebates and chargebacks and fewer price-appreciation credits. The company reported $13 million of price-appreciation credits in 2016 versus $171 million in 2015.
- Debt declined 4% to $29.846 billion, principally through repayments, while cash decreased by $55 million. Working capital increased to $1.468 billion, partly reflecting assets held for sale.
- The company changed its reportable-segment structure in the third quarter and recast prior-period segment figures. It also reported a 2016 goodwill impairment charge after revised forecasts and reporting-unit realignment.
Outlook, management commentary, risks and unusual items
- Debt and covenant sensitivity: The company was in compliance with financial maintenance covenants at December 31, 2016 and forecast continued compliance for the following 12 months only after taking planned divestitures into account. Management said that absent the identified actions, it would not comply with those covenants. If divestitures failed to close or results fell below forecast, planned responses included SG&A and R&D reductions, further divestitures or seeking credit-facility amendments. A covenant breach could permit acceleration of debt; the company stated it could not repay accelerated debt without refinancing.
- Planned divestitures: In January 2017, the company agreed to sell Dendreon for approximately $820 million and the CeraVe, AcneFree and AMBI brands for approximately $1.3 billion. Proceeds were intended for debt repayment; closing was subject to customary conditions and approvals. Dendreon generated $303 million of 2016 revenue. The filing expected the transactions to close in the first half of 2017.
- Strategy and investment: Management expected acquisitions to remain much lower for the foreseeable future and said it expected to maintain R&D investment at the 2016 level. R&D expense was $421 million in 2016, up 26%. The company reported more than 100 pipeline projects, 45 actively funded, and expected to launch or have launched more than 15 associated products during 2017; these are management expectations, not guarantees.
- Pricing and distribution: Management committed to average annual prescription-drug price increases no greater than single digits and below the branded-biopharmaceutical industry’s five-year weighted average. No 2016 pricing increases were taken on dermatology and ophthalmology products; their net pricing declined by more than 10% on average. Walgreens fulfillment arrangements initially brought operational challenges, increased volume and lower realized prices; management reported improving realized prices later in 2016. Sales of covered dermatology and ophthalmology products through Walgreens were $375 million in 2016.
- Legal, regulatory and reputational exposure: The filing describes ongoing government inquiries and investigations involving pricing, patient-assistance programs, marketing, distribution, accounting and the former Philidor relationship, alongside U.S. and Canadian securities, RICO, antitrust and product-liability litigation. Outcomes, timing and potential losses were often not estimable. The company recorded a $210 million proposed settlement of Salix securities litigation in 2016, subject to definitive agreement and court approval.
- Unusual and non-recurring items: The $1.077 billion goodwill impairment related to the former U.S. reporting unit and Salix. Other notable items included $422 million of asset impairments, including a $199 million Ruconest impairment, and $132 million of restructuring and integration costs. A $27 million income-tax recovery did not prevent a substantial net loss.
- Controls and audit: Management and the auditor concluded that internal control over financial reporting was effective at December 31, 2016. Previously disclosed material weaknesses relating to tone at the top and non-standard revenue transactions were reported as remediated. The auditor issued an unqualified opinion on the financial statements and internal controls. The filing also describes prior restatements and delayed filings, making continued control effectiveness and timely reporting important to monitor.
- Other risks: Significant generic competition and upcoming loss of exclusivity, foreign-exchange exposure, high floating-rate debt, single-source supply dependencies, product-liability self-insurance, potential future impairments and uncertainty around new-product launches (including Siliq and Addyi) could affect results.
Most important facts an investor should verify
- Whether the announced Dendreon and skincare-brand divestitures closed as planned, their net proceeds after taxes and costs, and the actual debt repayment achieved.
- Current debt balances, maturities, interest costs and covenant headroom; specifically, whether covenant compliance depended on completed asset sales or additional cost reductions.
- Whether core-product revenue, realized pricing, volume and rebates stabilized after the 2016 declines, including performance of Xifaxan and Walgreens-channel products.
- Progress and financial impact of generic entry or loss of exclusivity for the products identified in the filing, and the outcome of key patent disputes, including Xifaxan litigation.
- Developments and potential liabilities from the Philidor-related investigations, securities and RICO cases, Salix matters, and other significant legal proceedings.
- Whether the reported remediation of internal-control weaknesses remains effective and whether subsequent filings and financial estimates are timely and reliable.
- Actual launch timing, uptake, safety requirements and economics for Siliq and other pipeline products, and whether further goodwill or intangible-asset impairments are required.