Business context and reporting period
The filing is Valeant Pharmaceuticals International, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed February 28, 2013. Although the request identifies Bausch Health, the registrant named in this filing is Valeant; the filing text does not identify Bausch Health as the reporting company. The 2012 results include a full year of Valeant’s operations and acquired businesses, but Medicis only from its December 11, 2012 acquisition date. The company was a multinational specialty pharmaceutical business focused on dermatology, neurology, branded generics and OTC products.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $3.547 billion | $2.463 billion |
| Operating income | $79.7 million | $300.0 million |
| Operating margin | 2.2% | 12.2% |
| Net income (loss) | $(116.0) million | $159.6 million |
| Diluted earnings (loss) per share | $(0.38) | $0.49 |
| Cash from operations | $656.6 million | $640.5 million |
| Cash and cash equivalents at year-end | $916.1 million | $164.1 million |
| Long-term debt, including current portion | $11.016 billion | $6.651 billion |
| Working capital | $954.7 million | $433.2 million |
Product sales were $3.310 billion; alliance and royalty revenue was $171.8 million; and service and other revenue was $64.9 million. Cost of goods sold was 26% of revenue. Operating cash flow less capital expenditures of $107.6 million was approximately $549.0 million. The company reported a $278.2 million income-tax recovery, principally deferred, which partly offset a pre-tax loss of $394.2 million. Interest expense was $473.4 million, up 42% year over year. Net financial liabilities were $10.10 billion at year-end.
Year-end current assets were $2.777 billion and current liabilities were $1.823 billion, implying a current ratio of approximately 1.52. The company reported $480.2 million of current maturities of long-term debt and $10.5 million of short-term borrowings. It stated that cash, operating cash flows and available credit were sufficient for current liquidity needs and that it complied with debt covenants at year-end.
Material changes versus the prior comparable period
- Revenue increased 44%, driven mainly by acquired businesses and product rights, including Medicis, OraPharma, iNova, Dermik and others, plus growth in existing products. Revenue growth did not translate into higher reported operating or net income.
- Net income of $159.6 million in 2011 turned into a net loss of $116.0 million in 2012. Operating income fell to $79.7 million from $300.0 million. Major pressures included higher amortization, restructuring and integration costs, interest expense, R&D impairments, acquisition costs and legal settlements.
- Amortization expense rose 67% to $928.9 million. Restructuring, integration and other costs increased to $344.4 million; in-process R&D impairments and other charges were $189.9 million; and legal settlements were $56.8 million.
- Operating cash flow was broadly stable, increasing 3% to $656.6 million, while cash rose substantially with debt issuance and acquisition-related financing. Investing activities used $2.966 billion, principally for acquisitions.
- Debt increased 66% to $11.016 billion, primarily due to financing for Medicis, including senior notes, term loans and debt assumed in the acquisition. The company paid $280.7 million to repurchase shares and declared no dividends.
- Generic competition reduced sales of Cardizem CD, Diastat, Ultram ER and Wellbutrin XL in the U.S. Neurology and Other segment by a combined $80.8 million; Cesamet sales in Canada and Australia fell 54% to $29.4 million.
Outlook, commentary, risks and unusual items
- Integration and savings: Management expected to achieve approximately $275 million of Medicis-related annual cost synergies by the end of 2013. It estimated up to $275 million in associated integration and rationalization costs, with $85.6 million incurred through year-end 2012; a separate $77.3 million charge for accelerated Medicis employee awards was recognized and paid in 2012. Management also reported realizing approximately $350 million of annual synergies from the earlier Biovail–Valeant merger.
- Products and development: Potiga was launched in the U.S. in 2012, and the company recognized a $45 million GSK milestone. FDA review dates disclosed for 2013 included May 24 for efinaconazole and December 11 for luliconazole. These are regulatory milestones, not revenue guidance. The filing provides no clear formal 2013 revenue or earnings guidance.
- Pipeline impairments: The company terminated IDP-107 after reviewing Phase 2 results and wrote off $133.4 million. It also recorded a $24.7 million impairment for a Xerese life-cycle program and other development-related charges. The company said further impairment could occur, including for ezogabine/retigabine, whose carrying value was $682.5 million at year-end.
- Legal and compliance: The company recorded $56.8 million of legal settlement charges, primarily associated with antitrust litigation. A separate Anacor dispute sought at least $215 million in damages; the company said it would contest the claims. Other patent, product, securities and regulatory matters remain, and outcomes or potential losses are not always estimable. The company operates under a Corporate Integrity Agreement and faces generic challenges to several brands.
- Key business risks: Significant leverage and debt-service costs; floating-rate and foreign-exchange exposure; generic erosion and limited exclusivity for some products; acquisition integration and synergy execution; reliance on third-party manufacturers and some single-source inputs; pricing, reimbursement and healthcare regulation; and tax uncertainty. McKesson and Cardinal Health each accounted for 20% of 2012 revenue.
- Other unusual items: The year included substantial acquisitions, a $66.3 million sale of IDP-111 and 5-FU assets, $615.4 million of proceeds from securities acquired with Medicis, and $77.3 million of change-in-control share-based compensation costs. The company disclosed that internal controls over financial reporting were assessed as effective, but the assessment excluded certain 2012 acquired businesses representing approximately 6% of revenue and 4% of assets.
Most important facts an investor should verify
- Confirm the registrant and period: this is Valeant’s full-year 2012 Form 10-K, not a filing under the Bausch Health name or a standalone fourth-quarter report.
- Reconcile the sharp decline in operating income and the net loss to recurring performance versus amortization, integration costs, impairments, legal charges and tax benefits.
- Review debt maturities, interest-rate exposure, covenants, and the effect of the 2013 repricing transactions; the filing reports year-end debt of $11.016 billion.
- Assess whether the expected Medicis synergies can be achieved within the stated timetable and costs, and how much of reported growth reflects acquisitions rather than existing operations.
- Monitor generic competition, key product concentration, pipeline approvals and impairment assumptions, as well as the Anacor matter and other legal and regulatory proceedings.