Business context and reporting period
Valeant Pharmaceuticals International, Inc. (now Bausch Health Companies Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The specialty pharmaceutical and medical-device company operated in Developed and Emerging Markets. Salix Pharmaceuticals was acquired on April 1, 2015; 2015 results therefore include Salix only from the acquisition date.
Key financial metrics
Unless noted otherwise, amounts are U.S. dollars.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,732.4 million | $2,041.1 million | $4,923.3 million | $3,927.3 million |
| Operating income | $341.5 million | $355.1 million | $884.9 million | $711.7 million |
| Net income (loss) attributable to Valeant | $(53.0) million | $125.8 million | $20.7 million | $103.2 million |
| Diluted earnings (loss) per share | $(0.15) | $0.37 | $0.06 | $0.30 |
| Operating cash flow | $410.5 million | $376.0 million | $901.6 million | $860.3 million |
- Q2 revenue grew 34% year over year; first-half revenue grew 25%. Growth included acquired products, existing-business sales gains, and was partly offset by foreign exchange and divestitures.
- Q2 operating margin was approximately 12.5%, compared with 17.4% a year earlier. Q2 net loss reflected sharply higher operating expenses and interest expense. Cost of goods sold was 25% of revenue, versus 28% in Q2 2014.
- Product-sales deductions rose to 32% of gross product sales in Q2, from 27% a year earlier, primarily due to rebates, chargebacks, returns, and launch-related assistance programs.
- At June 30, cash and cash equivalents were $958.0 million; current assets were $6.35 billion and current liabilities $4.29 billion. Long-term debt was $30.29 billion, with a further $590.9 million current portion. Total debt carrying value was $30.88 billion, versus $15.23 billion at December 31, 2014.
- Net cash used in investing was $13.89 billion for the first half, largely reflecting acquisitions. Financing activities provided $13.63 billion, principally from debt and equity financing for Salix.
Material changes versus prior period
- Salix and other acquisitions drove much of the revenue and balance-sheet expansion. Salix contributed $313 million in revenue and a $200 million net loss from acquisition through June 30; its reported net loss included acquisition-accounting adjustments and related costs.
- Q2 SG&A increased 33% to $685.5 million and amortization and impairments of finite-lived intangibles increased 60% to $585.4 million. Q2 interest expense rose 71% to $412.7 million, reflecting acquisition-related debt and financing costs.
- Goodwill rose to $17.23 billion from $9.35 billion and net intangible assets to $23.15 billion from $11.26 billion, primarily reflecting acquired businesses.
- First-half operating cash flow increased 5% to $901.6 million, but the company reported a $298 million working-capital investment, primarily related to post-acquisition receivables.
Outlook, commentary, risks and unusual items
- Management identified approximately $530 million in annual run-rate Salix cost synergies, expected to be substantially achieved by year-end 2015, and estimated approximately $300 million of related restructuring and integration costs, expected to be substantially completed by mid-2016. These are targets, not guaranteed results.
- Management said Salix wholesaler inventory was reduced in Q2 and further reductions were anticipated in Q3 2015. The filing provides no numerical full-year revenue or earnings guidance.
- Q2 included $168 million of post-combination expense related to accelerated Salix employee restricted stock, reported in other expense. First-half restructuring, integration, and other costs were $198.4 million. A $12.3 million IPR&D write-off followed Phase 3 study analysis for the Arestin Peri-Implantitis program.
- Key risks include substantial debt and interest-rate exposure, acquisition integration and synergy execution, foreign-exchange volatility, generic competition, pricing and reimbursement pressures, and legal and regulatory matters. Salix-related matters include government inquiries and securities litigation concerning historic wholesaler inventory disclosures and internal controls. The company said it could not predict outcomes for certain proceedings.
- Debt covenants were reported in compliance at June 30, 2015; management believed cash and operating cash generation would meet current liquidity needs and debt maturities. Credit ratings were Ba3 at Moody’s and BB- at S&P. Management concluded disclosure controls were effective.
- Subsequent to quarter-end, the company agreed to acquire Amoun Pharmaceutical for approximately $800 million plus contingent payments.
Important facts for investors to verify
- Whether Salix integration, the anticipated wholesaler inventory reductions, and the $530 million annual synergy target are achieved, and what further costs are incurred.
- Debt repayment capacity and sensitivity to rates: the filing estimates a 100-basis-point rate increase would add about $78 million in annualized pretax interest expense on variable-rate debt.
- Whether acquired-product sales and organic growth offset currency headwinds, divestitures, rebate growth, and potential generic competition.
- Final purchase-accounting valuations, including Salix’s provisional acquired assets, liabilities, goodwill, and contingent consideration.
- Developments in Salix-related investigations and litigation, the Solodyn antitrust matters, and the Russian AntiGrippin appeal; the filing does not provide a clear estimate for potential losses in several proceedings.