SEC Filing Summary: Valeant Pharmaceuticals International, Inc. — Form 10-Q
Identity note: Although the request identifies Bausch Health Companies Inc., this 2010 filing is by Valeant Pharmaceuticals International, Inc., renamed from Biovail Corporation when Biovail completed its acquisition of Valeant on September 28, 2010. The filing reports in U.S. dollars. Financial amounts below are in millions unless noted.
Business context and reporting period
The unaudited filing covers the quarter and nine months ended September 30, 2010. Biovail was the accounting acquirer, so reported results primarily reflect Biovail; Valeant’s post-merger revenue and earnings through September 30 were not material to reported consolidated results. The company operates in specialty pharmaceuticals, branded generics and OTC products, with a focus on neurology and dermatology.
For context, management provided pro forma results as if the merger had closed on January 1, 2009. These are not the reported results and exclude potential merger synergies and integration costs.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $208.3 | $212.5 | $666.7 | $579.4 |
| Operating income (loss) | $(126.3) | $58.3 | $(61.1) | $122.5 |
| Net income (loss) | $(207.9) | $40.4 | $(177.1) | $103.5 |
| Diluted EPS | $(1.27) | $0.25 | $(1.11) | $0.65 |
| Operating cash flow | $110.9 | $89.2 | $264.6 | $233.3 |
- Operating margin was approximately (60.7)% in Q3 2010 versus 27.5% in Q3 2009, and (9.2)% for the first nine months versus 21.1% a year earlier. The losses were heavily affected by merger-related and other unusual charges.
- At September 30, cash and cash equivalents were $592.7; working capital was $454.5. Current assets were $1,300.4 and current liabilities $845.9.
- Total debt, including current maturities, was $3,235.6, compared with $326.1 at year-end 2009. Cash less debt implies net debt of approximately $2,642.9; cash and marketable securities less debt was $2,633.7.
- Nine-month cash from investing activities was $262.1, including $309.0 of net cash acquired with Valeant. Financing activities used $48.8. Cash increased $478.2 over the nine-month period.
- Debt included $1,000.0 of Term Loan A, $500.0 of Term Loan B, $1,193.1 of senior notes (net of discounts), $305.3 of 5.375% convertible notes, $220.5 of 4.0% convertible notes and a $16.6 Cambridge obligation. The $125.0 revolving facility was available for working capital and general corporate purposes.
Merger comparability: Standalone Valeant reported Q3 2010 revenue of $259.2, up 18% from $220.3, but management cautioned that shipping cutoffs and integration activities made the comparison imperfect. Pro forma combined revenue was $467.5 for Q3 2010 versus $432.8 in Q3 2009, and $1,413.5 for the first nine months of 2010 versus $1,169.3 in 2009. Pro forma net loss was $111.5 and $84.1, respectively, in 2010, compared with net income of $23.2 and $6.8 in the comparable 2009 periods.
Material changes versus prior periods
- Reported revenue fell 2% in Q3 but rose 15% for the first nine months. Growth over nine months reflected Wellbutrin XL rights, Xenazine and generic Tiazac/Cardizem CD sales; declines in Ultram ER and Cardizem LA from generic competition partially offset growth.
- Q3 operating expenses rose to $334.6 from $154.2, including $95.9 of restructuring and other costs, $28.0 of merger transaction costs, and $38.5 of legal settlements. Nine-month expenses were $727.8 versus $456.9.
- Other significant Q3 loss drivers included a $48.0 valuation allowance against U.S. tax-loss deferred tax assets, $20.9 of merger-related share-based compensation, a $5.8 write-off of deferred financing costs and a $5.0 auction-rate securities loss. The tax provision was $60.0 despite a pretax loss, partly reflecting the valuation allowance and merger-related tax effects.
- Intangible assets rose to $6,470.6 and goodwill to $2,963.9, largely due to provisional merger accounting. The company said acquired asset valuations, useful lives, tax balances and goodwill allocation remained subject to finalization and could change significantly.
Outlook, management commentary and risks
- Management targeted more than $300 million of annual cost synergies by the end of 2012 and expected a combined cash tax rate of approximately 15% by then. These were forward-looking targets, not guarantees.
- Merger integration and cost-rationalization costs were estimated at $135–$180 million, including approximately $55 million expected to be non-cash. About 500 employee terminations were planned or completed; $95.0 million of related costs had been incurred by quarter-end.
- The company adopted a leveraged R&D approach and discontinued or moved to terminate several Biovail pipeline programs, eliminating stated potential milestone obligations of up to $690 million; negotiated termination payments included $5.0 million for GDNF and $8.75 million for pimavanserin. AMPAKINE development was suspended. After quarter-end, the FDA issued a Complete Response Letter for AZ-004, and the company said it would terminate that agreement.
- Ezogabine/retigabine remained under FDA review, with the PDUFA target extended to November 30, 2010; the FDA had requested a risk evaluation and mitigation strategy. Other dermatology candidates ranged from Phase I to Phase III.
- On November 4, the board declared a $1.00-per-share special dividend payable December 22, 2010. The company said it did not intend to pay regular dividends thereafter. A securities repurchase program of up to $1.5 billion was authorized, subject to financing restrictions and required approvals.
- Liquidity risks include substantial leverage, variable-rate borrowing, restrictive covenants and dependence on cash generation to service debt. A 100-basis-point rate change was estimated to affect annual pretax earnings and cash flow by about $10 million on variable-rate debt. Key additional risks include merger integration, generic competition, product and regulatory outcomes, healthcare reform, international currency exposure, tax treatment and unresolved litigation.
- Healthcare reform had not materially affected results through Q3, but management warned that Medicaid rebates, Medicare discounts, the branded-drug fee and related implementation could adversely affect future results.
- The filing reported effective disclosure controls as of September 30, 2010. It also described numerous legal matters; outcomes and potential losses were generally not estimable, although $38.5 million had been accrued for certain settlements.
Most important facts for investors to verify
- Confirm the correct issuer and reporting basis: this is a Biovail-as-accounting-acquirer filing, not a full-quarter combined Valeant report.
- Track whether the company achieves the stated $300 million-plus synergy target by year-end 2012 and how actual integration costs compare with the $135–$180 million estimate.
- Assess debt service capacity, covenant headroom, variable-rate exposure and cash available after the special dividend and other capital-allocation actions.
- Review final purchase-price allocations and any resulting changes to goodwill, acquired intangibles, amortization, deferred taxes or impairment risk.
- Monitor product concentration and generic erosion, especially Ultram ER and Cardizem LA, alongside growth in Xenazine and other products.
- Follow regulatory decisions and pipeline progress, healthcare-reform implementation, and material developments in the disclosed litigation and settlement matters.