Bausch Health Companies Inc. quarterly report, Q3 FY2012

Business context and reporting period

This is Valeant Pharmaceuticals International, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012, filed November 5, 2012. The supplied company label, Bausch Health Companies Inc., does not match the registrant named in this filing; the filing describes Valeant, a multinational specialty pharmaceutical company. Unless stated otherwise, amounts below are U.S. dollars.

Financial performance and position

Revenue growth reflected substantial contributions from acquired businesses, alongside growth in existing dermatology products. Management cited generic competition affecting several neurology products and Cesamet. Operating costs increased faster than revenue: nine-month amortization rose 72% to $629.4 million, restructuring and integration costs rose to $135.2 million, and acquired in-process R&D expense was $149.9 million. The third-quarter net result included a $97.0 million income-tax recovery; the nine-month tax recovery was $92.7 million.

At September 30, 2012, cash and cash equivalents were $257.7 million, total current assets $1,713.7 million, and current liabilities $1,158.5 million. Total assets were $14.15 billion and shareholders’ equity $3.79 billion. Debt, including current maturities, was $7.63 billion, up 15% from year-end 2011; net financial liabilities were $7.38 billion. Interest expense was $318.7 million for the first nine months, up 33%. The company reported compliance with debt covenants at quarter-end.

Nine-month investing cash outflow was $991.9 million, primarily reflecting acquisitions and capital spending; financing cash inflow was $495.0 million. Operating cash flow increased year over year, but working capital absorbed cash, including from higher receivables and inventory. Cash increased $93.6 million from December 31, 2011.

Material changes versus the prior comparable period

• Reported revenue grew rapidly, but much of the increase came from acquisitions and nonrecurring alliance milestones or asset-sale proceeds. The company reported $596.9 million of incremental nine-month product sales from 2011 acquisitions and $134.7 million from 2012 acquisitions.
• Profitability weakened despite higher revenue: nine-month operating income fell 42% and the company moved from net income to a net loss. Higher amortization, acquired R&D charges, integration costs, interest expense, and legal settlements were key factors.
• U.S. Neurology and Other segment revenue declined 5% for the nine months; segment profit fell 38%, including the effects of generic erosion and increased amortization. U.S. Dermatology and Emerging Markets segment profit increased.
• Debt rose by $979.2 million from year-end 2011, principally due to new Term Loan B borrowings, while the company also repurchased $280.7 million of common shares during the first nine months.

Outlook, commentary, risks and unusual items

• No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management said cash on hand, operating cash flow, and available credit facilities were expected to meet current liquidity needs, while noting that further acquisitions could require additional financing.
• Management reported approximately $350 million of annual cost synergies realized as of September 30, 2012. It estimated merger-related integration costs of up to $200 million and said $195.9 million had been incurred to date.
• The Medicis acquisition, agreed at approximately $2.6 billion, was pending required approvals and was expected to close in the first half of 2013. After quarter-end, Valeant raised $1.75 billion of 6.375% notes in escrow for the deal and issued a further $500 million of 6.375% notes for general corporate purposes, including potential acquisitions. Failure to complete Medicis would trigger mandatory redemption of the escrowed notes.
• Other subsequent events included an October 2 repricing of $1.3 billion of Term Loan B debt, with a reported $13 million prepayment premium; a $43 million ex-U.S. consumer-brand asset acquisition; and a $79.3 million payment under a Bristol-Myers Squibb collaboration and option arrangement.
• Unusual charges included a $133.4 million write-off of the IDP-107 R&D asset after termination of the program, a $12.0 million payment to terminate an R&D commitment, and a $56.8 million nine-month legal-settlement expense. The Wellbutrin XL antitrust settlement was $49.25 million plus up to $0.5 million in notice costs and was subject to court approval.
• Disclosed risks include substantial leverage and debt-service requirements, acquisition execution and integration, generic competition, product and regulatory outcomes, foreign-exchange and interest-rate exposure, tax uncertainty, and pending litigation. A newly disclosed arbitration demand from Anacor sought at least $215 million in damages; Valeant said it intended to contest the claims.

Important facts for investors to verify

1. Confirm the intended issuer: this filing is for Valeant Pharmaceuticals International, Inc., not a registrant named Bausch Health Companies Inc.
2. Assess the quality and durability of revenue growth by separating acquired sales, existing-business growth, asset-sale proceeds, and milestone revenue.
3. Review debt maturities, interest costs, covenant headroom, and the financing and mandatory-redemption terms tied to the pending Medicis acquisition.
4. Track whether reported cost synergies translate into sustainable operating profit and cash flow after integration expenses and amortization.
5. Monitor generic erosion, pipeline and regulatory outcomes, the Anacor arbitration, and the status and cash cost of other legal matters.