Business context and reporting period
This is Valeant Pharmaceuticals International, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed February 29, 2012—not a Bausch Health Companies Inc. filing. The company became Valeant after Biovail acquired Valeant in September 2010; Biovail was the accounting acquirer. Accordingly, 2010 includes Valeant’s results only from the merger date and is not a full-year comparable.
Valeant was a multinational specialty pharmaceutical company focused on neurology, dermatology, branded generics and OTC products. Its 2011 expansion included acquisitions such as PharmaSwiss, Sanitas, Dermik, Ortho Dermatologics, Afexa and iNova, plus rights to Zovirax and Elidel/Xerese.
Key financial metrics
Amounts are in U.S. dollars. Financial results below are for the year ended December 31 unless stated otherwise.
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $2,463.5 million | $1,181.2 million |
| Operating income (loss) | $300.0 million | $(110.1) million |
| Net income (loss) | $159.6 million | $(208.2) million |
| Diluted EPS | $0.49 | $(1.06) |
| Cash from operating activities | $676.5 million | $263.2 million |
| Cash and cash equivalents at year-end | $164.1 million | $394.3 million |
| Working capital | $433.2 million | $327.7 million |
| Long-term debt, including current portion | $6,651.0 million | $3,595.3 million |
| Total assets | $13,141.7 million | $10,795.1 million |
Operating margin was approximately 12.2% and net margin approximately 6.5% in 2011. Cost of goods sold was 28% of revenue, compared with 33% in 2010; management attributed much of the improvement to lower Zovirax supply costs after acquiring U.S. rights. These ratios reflect reported results, including acquisition accounting and unusual charges.
Interest expense rose to $333.0 million from $84.3 million. The company reported a $177.6 million income tax recovery, primarily deferred, despite a pre-tax loss of $18.0 million; the tax recovery materially contributed to reported net income. Investing activities used $2,844.5 million, principally for acquisitions. Financing activities provided $1,948.2 million, including debt issuance and borrowings. Net financial liabilities were $6,480.6 million at year-end.
In fourth-quarter 2011, revenue was $688.5 million, operating loss was $5.6 million, net income was $55.9 million, and operating cash flow was $189.8 million. Fourth-quarter operating results included substantial impairment charges.
Material changes versus the prior comparable period
- Revenue increased 109%, largely because 2011 included a full year of Valeant operations and contributions from acquisitions; the 2010 comparison included Valeant only after the September merger. Unaudited pro forma revenue was $2,927.4 million for 2011 versus $2,624.2 million for 2010, but the filing cautions that pro forma results are not necessarily indicative and exclude certain synergies and integration effects.
- Reported net income swung from a $208.2 million loss to $159.6 million income. The change reflected higher product contribution and tax recovery, partly offset by sharply higher amortization, interest and R&D impairment charges.
- Operating cash flow increased to $676.5 million, while cash fell $230.2 million to $164.1 million, reflecting heavy acquisition spending, debt repayments, securities repurchases and other uses.
- Debt increased 85% to $6.65 billion, and shareholders’ equity declined 18% to $4.01 billion. The company issued senior notes and drew on secured credit facilities while also repurchasing shares and debt.
- Major products remained concentrated: Wellbutrin XL represented 9% of consolidated revenue in 2011, down from 21% in 2010; Zovirax represented 8%, down from 14%. U.S. Wellbutrin XL sales fell 15% amid generic competition, while Xenazine and Zovirax sales grew.
Outlook, commentary, risks and unusual items
- Management plans: The company targeted approximately $350 million in annual merger cost synergies by the end of 2012 and reported approximately $315 million achieved in 2011. It also identified approximately $200 million in expected annualized synergies from recent acquisitions, with implementation anticipated to be completed in 2012. These are management targets, not formal financial guidance; the filing provides no clear numerical revenue or earnings guidance.
- Products and pipeline: U.S. launch of Potiga (ezogabine) was anticipated in the second quarter of 2012; management expected to file U.S. and Canadian applications for IDP-108 in 2012 and anticipated a Cold-FX pediatric filing in the fourth quarter of 2012. Approval, launch, uptake and development timing remain uncertain.
- Impairments and one-time effects: The company recorded $105.2 million of acquired IPR&D impairment charges in the fourth quarter following unfavorable study results, FDA feedback, reassessment of project risk and pipeline prioritization. It also recorded $27.7 million of impairment charges on IDP-111 and 5-FU, which it was required to divest; the products were sold to Mylan in February 2012 for $66.2 million. Other notable items included a $36.0 million Cloderm out-license payment, a $40.0 million GSK milestone for Trobalt, and a $21.3 million gain on the Cephalon investment.
- Leverage and liquidity: Debt service and access to financing are important risks. Moody’s downgraded the senior secured debt rating from Baa3 to Ba1 in January 2012. The company said it was in covenant compliance at year-end and believed cash, operating cash flow and credit-facility availability would meet current needs. A February 2012 credit agreement added $600 million of Tranche B term loans. Dividend payments were restricted by covenants, and management did not intend to pay cash dividends in the foreseeable future.
- Other risks: Generic competition, product safety and regulatory outcomes, acquisition integration, foreign exchange, interest rates, tax positions, litigation and reliance on third parties for manufacturing and distribution could affect results. Three U.S. wholesalers accounted for 54% of 2011 revenue: McKesson 23%, Cardinal Health 21% and AmerisourceBergen 10%. The company operated under a five-year Corporate Integrity Agreement and disclosed continuing litigation and tax audits.
- Controls: Management and the auditor concluded internal control over financial reporting was effective as of year-end. The assessment excluded acquired businesses representing approximately 11% of 2011 revenue and 4% of year-end assets.
Important facts for investors to verify
- Confirm the issuer and period: this is Valeant’s FY2011 10-K, not Bausch Health’s, and the 2010 comparison is merger-distorted.
- Assess how much revenue and cash flow growth came from acquired businesses versus existing operations; review the unaudited pro forma figures and their stated limitations.
- Reconcile reported earnings with the $177.6 million tax recovery, $105.2 million IPR&D impairment, high amortization and $333.0 million interest expense.
- Review debt maturities, variable-rate exposure, credit covenants, post-year-end borrowing and the ability to fund acquisitions while servicing debt.
- Test the assumptions supporting acquisition valuations, expected synergies, pipeline milestones and future amortization; several 2011 purchase-price allocations were provisional.
- Track generic erosion and litigation affecting Wellbutrin XL, Cardizem, Glumetza and other products, as well as customer concentration and foreign-currency sensitivity.