Bausch Health Companies Inc. (then Valeant Pharmaceuticals International, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context and results
The company develops and sells branded, generic and over-the-counter medicines and medical devices in more than 100 countries. Its reportable segments were Bausch + Lomb/International, Branded Rx and U.S. Diversified Products. Management said it was concentrating on core eye-health, gastrointestinal and dermatology businesses, while prioritizing debt reduction over acquisitions.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2,109 | $2,372 | Down $263 (11%) |
| Operating income | $211 | $66 | Up $145 |
| Net income (loss) attributable to Valeant | $628 | $(374) | Improved $1,002 |
| Operating cash flow | $954 | $557 | Up $397 |
| Cash and cash equivalents, March 31 | $1,210 | $1,310 | Down $100 year over year |
| Long-term debt, net of discounts and issuance costs | $28,544 | $29,846 at Dec. 31, 2016 | Down $1,302 |
Net income included a $924 tax recovery, including $889 of net discrete tax benefits, principally from recognizing a deferred tax asset. It therefore does not represent a comparable improvement in underlying operating performance. Interest expense was $474, up $47 year over year; the company also recorded a $64 debt-extinguishment loss.
Revenue, segments and margins
Revenue declined mainly from lower U.S. Diversified and Branded Rx sales, product exclusivity losses and generic competition, adverse foreign exchange (notably the Egyptian pound), divestitures and lower realized pricing. Bausch + Lomb/International revenue was $1,150, essentially flat; Branded Rx revenue was $604, down 9%; and U.S. Diversified Products revenue was $355, down 37%. Segment profit was $333, $326 and $264, respectively. Total segment profit was $923, down 10%; reported segment profit margin was 44%, versus 43%.
Consolidated operating income improved despite lower sales, helped by lower SG&A and a $319 gain on the skincare-brand sale. This was partly offset by $138 of asset impairments and lower product contribution. Cost of goods sold was 28% of product sales, versus 27% a year earlier; management attributed the increase primarily to product mix.
Cash, debt and liquidity
Operating cash flow rose to $954, helped substantially by working-capital movements, including collections of receivables; it should not be read as solely reflecting earnings growth. Investing activities provided $1,148, including $1,317 of net proceeds from asset and business sales, chiefly the skincare transaction. Financing activities used $1,442, principally reflecting debt repayments and refinancing transactions.
At March 31, debt principal was $28,880 and cash was $1,210. In March, the company issued $3,060 of incremental term loans and $3,250 of secured notes, refinanced nearer-term obligations, repurchased $1,100 principal amount of 2018 unsecured notes and used asset-sale proceeds to repay debt. It reported that $1,190 of revolving-credit commitments had been extended to April 2020; $310 remained scheduled to mature in April 2018. Revolver borrowings were $525, with $924 of remaining availability. The weighted-average stated interest rate was 6.00%, versus 5.75% at year-end.
The company was in compliance with its financial maintenance covenants at March 31 and expected to remain compliant and meet debt service for the following 12 months, based on its then-current forecast and amendments. It said existing cash and operating cash generation should cover 2017–2019 debt service. Management also disclosed substantial debt-service needs: $1,594 of principal and interest expected for the remainder of 2017, before any applicable revolving-facility repayments.
Outlook, risks and unusual items
- Management expected 2017 R&D investment to exceed 2016 levels. It said the GI sales-force expansion would cost approximately $50–$60 and was expected to begin driving incremental Xifaxan revenue in the second half of 2017.
- The company planned to launch Siliq in the U.S. in the second half of 2017 following FDA approval. The product carries a boxed warning regarding suicidal thoughts or behavior and a Risk Evaluation and Mitigation Strategy.
- The company expected the sale of Dendreon for approximately $820 in cash to close around mid-2017, subject to customary conditions; proceeds were intended primarily for debt reduction. After quarter-end, it disclosed a further $220 debt prepayment using remaining skincare-sale proceeds and proceeds from a Brazil facility divestiture.
- Significant risks include extensive government investigations and litigation relating to pricing, marketing, distribution, accounting disclosures and the former Philidor relationship; generic competition and product loss of exclusivity; pricing and reimbursement pressure; foreign-exchange and floating-rate interest exposure; and the possibility of further impairment charges. The Salix reporting unit’s carrying value exceeded its estimated fair value at the 2016 annual test, although management said a new impairment test was not indicated at March 31. Addyi intangible assets had a carrying value of $858.
- Accrued loss contingencies and related legal fees totaled $348. A proposed $210 Salix securities-litigation settlement was accrued; final court approval remained pending. The filing also describes ongoing securities, RICO, antitrust, regulatory and other proceedings, whose outcomes and potential losses are uncertain.
- The company recognized a $96 impairment on assets held for sale and a $36 impairment on product and patent assets. It recorded a $76 charge for litigation and other matters. The $319 skincare-sale gain was a material non-recurring item.
- Management concluded disclosure controls were effective as of March 31, 2017. The filing nevertheless identifies prior financial-statement misstatements, restatement-related exposure and remediation of internal-control weaknesses as continuing matters to monitor.
Most important facts for investors to verify
- Whether revenue declines, generic competition and lower realized prices stabilize, particularly in U.S. Diversified Products and Branded Rx.
- How much reported cash generation came from sustainable operations versus working-capital timing and asset sales.
- Progress in reducing debt, meeting covenants and funding debt service; confirm refinancing terms, maturity schedule and interest-rate sensitivity.
- Whether the Dendreon sale and planned product launches occur on schedule and generate the expected proceeds or revenue.
- Developments in major litigation and investigations, including the Salix settlement and Philidor-related matters, and whether accrued reserves remain adequate.
- Potential further impairments, particularly for Salix goodwill and Addyi, and evidence that financial reporting controls remain effective.