Bausch Health Companies Inc. quarterly report, Q3 FY2017

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Bausch Health Companies Inc. (then Valeant Pharmaceuticals International, Inc.) — Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. Unaudited U.S. GAAP statements; amounts are in U.S. dollars. The company develops and sells branded and generic pharmaceuticals, OTC products, and medical devices across approximately 100 countries.

Financial performance and liquidity

  • Revenue: Q3 revenue was $2.219 billion, down 10% from $2.479 billion; nine-month revenue was $6.561 billion, down 10% from $7.271 billion. Management attributed declines chiefly to generic competition, lower volumes, divestitures and discontinuations, and foreign exchange; Bausch + Lomb/International partly offset the declines.
  • Profit: Q3 operating income was $38 million versus an $863 million operating loss in Q3 2016. Nine-month operating income was $424 million versus a $716 million loss. Net income attributable to Valeant was $1.301 billion for Q3 and $1.891 billion for nine months, compared with losses of $1.218 billion and $1.894 billion, respectively, in 2016. Results included substantial tax benefits and asset-sale gains, rather than reflecting operating improvement alone.
  • Taxes and unusual items: Income-tax recovery was $1.700 billion for Q3 and $2.829 billion for nine months, including $1.397 billion and $2.626 billion, respectively, from internal restructuring. Nine-month other income included gains on the skincare, iNova, and Dendreon sales totaling $720 million. The company also recorded $312 million of goodwill impairment and $629 million of asset impairments for the nine-month period; $352 million of the latter related to Sprout.
  • Margins: Cost of goods sold was 30% of product sales in Q3 versus 27% a year earlier, and 29% for nine months versus 27%. Management cited product mix and higher third-party royalties. Company-defined segment profit margin was 44% for Q3 versus 50%, and 44% for nine months versus 46%; this measure excludes various corporate, amortization, impairment, and other items.
  • Cash flow: Nine-month operating cash flow was $1.712 billion versus $1.575 billion. Investing cash flow was positive $2.797 billion, principally reflecting $3.063 billion of net asset-sale proceeds. Financing cash flow was negative $3.121 billion, principally reflecting debt repayments.
  • Debt and liquidity: September 30 long-term debt was $27.141 billion net of discounts and issuance costs ($27.426 billion principal), down from $29.846 billion net at December 31, 2016. Cash and cash equivalents were $964 million; an additional $928 million was restricted, mainly from the iNova sale and subsequently used for debt repayment. Revolver availability was $981 million. The company reported compliance with financial maintenance covenants and expected to meet debt service and remain compliant for the next 12 months.
  • Balance sheet: Total assets were $39.974 billion and total liabilities $34.552 billion at September 30, compared with $43.529 billion and $40.271 billion at year-end 2016. Goodwill was $15.573 billion and intangible assets $16.023 billion.

Material changes versus the prior comparable period

  • Revenue fell 10% in both the quarter and nine-month period. U.S. Diversified Products revenue declined 29% in Q3 and 31% year to date; Branded Rx declined 17% and 10%, respectively. Bausch + Lomb/International revenue rose 1% in Q3 and was down less than 1% year to date.
  • The company sold its CeraVe, AcneFree and AMBI skincare brands for $1.3 billion, Dendreon for an adjusted $845 million, and iNova for $938 million. Proceeds supported debt reduction; the sales also reduced ongoing revenue.
  • Debt refinancing and repayments reduced near-term maturities and changed the debt mix. After quarter-end, the company repaid $923 million of term debt with iNova proceeds, repaid another $125 million, and issued $1.0 billion of 5.50% secured notes due 2025 to repurchase 2020 notes. Management said these actions eliminated mandatory long-term principal repayments until March 2020.
  • Revenue deductions for discounts, returns, rebates, chargebacks and distribution fees increased to 42% of gross product sales from 40% for both the quarter and nine-month period.

Outlook, commentary and principal risks

  • Management’s strategy emphasized core eye-health and branded prescription businesses, operating efficiencies, internal R&D, and debt reduction; it expected acquisitions to remain limited. It cited sales-force expansion in GI and stabilization efforts in dermatology. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
  • Management said existing cash and cash generated from operations should meet liquidity needs for the next 12 months. It also noted that further divestitures or refinancing could be considered. These expectations depend on operating performance, access to financing, covenant compliance, and successful asset sales.
  • Key commercial risks include continued generic competition and loss of exclusivity, pricing and rebate pressure, sales declines in dermatology and U.S. Diversified Products, and execution and acceptance of new products. Xifaxan patent litigation and other product-IP disputes could affect important products.
  • The company disclosed extensive legal and regulatory exposure, including investigations concerning pricing, patient-assistance programs, distribution, accounting and the former Philidor relationship; U.S. and Canadian securities actions; and other litigation and arbitrations. Accrued current and non-current loss contingencies totaled $153 million. Outcomes and possible additional losses were not generally estimable.
  • The Australian Taxation Office assessed $117 million, including interest and penalties, for tax years 2011–2017. The company disputed the assessment and provided collateral, including $77 million of restricted cash and a $50 million letter of credit.
  • Goodwill and intangible values remain sensitive to forecasts and assumptions. Management noted that Salix’s carrying value exceeded its estimated fair value in the 2016 annual test, and future deterioration could require impairment charges. The company also cited floating-rate exposure: a 100-basis-point rate increase was estimated to add about $62 million to annual pre-tax expense and cash flows based on then-current borrowings.
  • Management stated disclosure controls were effective as of September 30, 2017. The filing’s forward-looking risk discussion also references remediation of previously identified internal-control weaknesses and the deficient control environment.

Investor verification priorities

  • Separate recurring operating performance from the large tax benefit, divestiture gains, contingent-consideration adjustments, and impairment charges when assessing earnings quality.
  • Confirm current debt balances, post-quarter repayments and refinancing, cash availability, covenant headroom, and the effect of interest rates and future maturities.
  • Track sales, pricing, rebates and generic competition by segment, especially for Xifaxan, dermatology products, and U.S. Diversified Products.
  • Review subsequent outcomes of the Sprout sale, pending Obagi sale, tax disputes, and material legal and regulatory proceedings.
  • Assess whether new-product launches and pipeline milestones can offset divestiture-related revenue losses and ongoing declines in established products.