Business context and reporting period
This is Valeant Pharmaceuticals International, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed February 28, 2014. The filing covers the company now identified in the request as Bausch Health; at the time, it operated as Valeant. The filing reports full-year results and provides unaudited fourth-quarter comparisons. Valeant was a multinational specialty pharmaceutical and medical-device company operating in more than 100 countries, with Developed Markets and Emerging Markets segments.
Growth in 2013 was driven substantially by acquisitions, including Bausch & Lomb (acquired August 2013), Obagi and Natur Produkt. Solta Medical was acquired in January 2014, after the reporting period.
Financial performance and position
All amounts below are U.S. dollars. Figures are GAAP unless otherwise noted.
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $5.770 billion | $3.480 billion |
| Operating income (loss) | $(409.5) million | $79.7 million |
| Net income (loss) attributable to Valeant | $(866.1) million | $(116.0) million |
| Diluted earnings (loss) per share | $(2.70) | $(0.38) |
| Net cash from operating activities | $1.042 billion | $656.6 million |
| Cash and cash equivalents at year-end | $600.3 million | $916.1 million |
| Long-term debt, including current portion | $17.368 billion | $11.016 billion |
| Working capital | $1.373 billion | $954.7 million |
- Revenue rose 66%, primarily reflecting acquired businesses. The filing attributes $2.466 billion of incremental product sales to 2012 and 2013 acquisitions combined; existing-business growth was partly offset by generic erosion, divestitures, foreign exchange and lower alliance revenue.
- Gross margin before separately reported intangible-asset amortization and impairment was approximately 68% in 2013 versus 74% in 2012, calculated from revenue less cost of goods sold. The decline reflected acquired-inventory accounting charges, mix and generic-driven declines in higher-margin products.
- Operating margin was approximately negative 7.1%; net loss margin was approximately negative 15.0%. Management-defined segment profit was $666.2 million, or about 11.5% of revenue, down 25%; it excludes specified corporate and acquisition-related costs and is not equivalent to GAAP operating income.
- Operating cash flow increased 59%. Investing activities used $5.380 billion, largely for acquisitions; financing activities provided $4.028 billion. Operating cash flow less capital expenditures was approximately $926.6 million, an arithmetic calculation rather than a company-reported free-cash-flow measure.
- Year-end current assets were $3.886 billion and current liabilities $2.512 billion (calculated current ratio approximately 1.55). Net financial liabilities were $16.767 billion. Interest expense was $844.3 million, versus $481.6 million in 2012; cash interest paid was $652.9 million.
- The company reported no dividends in 2013, 2012 or 2011 and did not intend to pay cash dividends in the foreseeable future. A $2.307 billion net common-stock issuance in June 2013 helped fund the Bausch & Lomb acquisition.
Material changes versus the prior comparable period
- FY 2013 revenue increased $2.289 billion, but the company moved from a $79.7 million operating profit in 2012 to a $409.5 million operating loss. Net loss widened by $750.1 million.
- Amortization and impairment of finite-lived intangible assets rose to $1.902 billion from $928.9 million. The main unusual charge was a $551.6 million impairment of ezogabine/retigabine; a related modified-release IPR&D asset was written off for $93.8 million.
- Restructuring, integration and other costs rose to $514.8 million from $344.4 million. Selling, general and administrative expense rose 73% to $1.305 billion, while research and development expense rose 98% to $156.8 million.
- Interest expense increased 75%, mainly due to higher borrowings associated with acquisitions. Long-term debt increased 58%, while cash declined 34%.
- Developed Markets revenue increased 72% to $4.293 billion and Emerging Markets revenue increased 51% to $1.476 billion. Segment profit fell 30% in Developed Markets to $573.2 million and rose to $93.0 million in Emerging Markets from a $24.9 million loss.
- In fourth-quarter 2013, revenue was $2.064 billion versus $986.3 million a year earlier; attributable net income was $123.8 million versus a net loss of $89.1 million. Quarterly operating cash flow was $279.9 million versus $67.9 million.
Outlook, management commentary, risks and contingencies
- Management expected to achieve more than $850 million in annual run-rate cost synergies from the Bausch & Lomb acquisition by the end of 2014. It estimated total related costs at approximately half the expected annual synergies; $364.2 million of specified restructuring, acquisition and integration costs had been incurred through year-end 2013. This is a synergy target, not formal revenue or earnings guidance.
- Management said acquisition integration, sales execution, systems and facility consolidation, and achieving projected synergies could prove difficult. It continued to pursue acquisitions and stated that additional financing, equity issuance or asset sales might be needed for future transactions.
- Generic competition materially affected Zovirax, Retin-A Micro, BenzaClin and Cesamet. The company anticipated further Zovirax ointment erosion and continued generic pressure on the other brands.
- The $551.6 million ezogabine/retigabine impairment followed FDA feedback on labeling and risk-management restrictions; GSK also planned to eliminate U.S. sales-force promotion and not launch in certain planned territories. Additional product and goodwill impairments remained possible.
- Valeant recorded a $142.5 million charge for its Anacor settlement, paid in the fourth quarter of 2013. It also recorded a $50 million charge related to AntiGrippin litigation; Natur Produkt appealed the adverse judgment. The filing says outcomes of many other proceedings could not be reasonably predicted or estimated.
- The company operated under a Corporate Integrity Agreement and faced extensive drug, device, pricing, marketing and privacy regulation. It also cited product liability, supply concentration, reimbursement, foreign-exchange, interest-rate, tax and intellectual-property risks.
- Debt covenants restricted certain actions, including dividends; Valeant reported covenant compliance at December 31, 2013. Its credit ratings were Ba3 from Moody’s and BB- from S&P. A 100-basis-point increase in rates was estimated to raise annual pretax expense and cash flows impact by approximately $51.7 million on variable-rate debt.
- Management reported effective disclosure controls and internal control over financial reporting. However, the assessment excluded Bausch & Lomb and Natur Produkt, which represented approximately 25% of 2013 consolidated revenue and 9% of year-end assets.
Most important facts for investors to verify
- How much of reported growth and operating cash flow is sustainable on an organic basis, given the large acquisition contribution and working-capital demands?
- Whether the company achieved the more-than-$850 million Bausch & Lomb synergy target, and how actual integration costs compared with estimates.
- The trajectory of net debt, interest expense, variable-rate exposure and scheduled debt repayments, including subsequent refinancing activity.
- Whether generic competition, product launches and pipeline approvals support revenue and margins sufficient to offset acquired-asset amortization and impairments.
- The final outcomes and cash exposure from AntiGrippin, Solodyn antitrust, intellectual-property, product-liability and other legal matters.
- The realization and audit risk associated with deferred tax assets, uncertain tax positions, low-tax jurisdictions and the company’s effective tax rate.
- The quality of reported controls after the acquired businesses are fully incorporated; the 2013 control assessment excluded two significant acquisitions.