Bausch Health Companies Inc. (then Valeant Pharmaceuticals International, Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited U.S. GAAP statements, with comparisons to Q1 2013. Amounts are U.S. dollars. The results include major acquisitions, particularly Bausch & Lomb (acquired August 2013), so year-over-year growth is not directly comparable with organic growth.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Revenue | $1,886.2 million | $1,068.4 million | Up 77%; acquisitions added $881.5 million of product sales, while existing-business growth excluding specified effects was $66.7 million. |
| Operating income | $356.6 million | $117.0 million | Operating margin approximately 18.9%, versus 11.0%. |
| Net loss attributable to Valeant | $22.6 million | $27.5 million | Loss per share was $0.07 versus $0.09. |
| Operating cash flow | $484.3 million | $255.3 million | Up 90%. |
| Cash and cash equivalents | $576.3 million | $600.3 million at Dec. 31, 2013 | Quarterly decrease of $24.0 million. |
| Total debt, including current portion | $17,386.9 million | $17,367.7 million at Dec. 31, 2013 | Carrying amount; debt fair value was reported as $18.4 billion. |
- Cost of goods sold, excluding amortization and impairment, was 27% of revenue in both periods, implying a 73% gross margin on that measure. SG&A was 26% of revenue versus 23%; R&D was 3% versus 2%.
- Segment revenue and profit: Developed Markets $1,421.8 million and $439.3 million (31% segment margin); Emerging Markets $464.4 million and $68.1 million (15%). Segment profit excludes certain corporate, restructuring, acquisition and other items.
- Investing cash outflow was $384.1 million, including $306.3 million for acquisitions, $21.1 million for intangible and other assets, and $58.1 million for property and equipment. Financing cash outflow was $122.7 million.
- Current assets were $3,950.1 million and current liabilities $2,563.0 million at quarter-end. The company reported compliance with debt covenants.
Material changes versus Q1 2013
- Revenue and segment profit rose substantially, primarily because of acquired businesses, including B&L, Obagi and Solta Medical. Management attributed $53.9 million of lower Developed Markets product sales to generic competition, and cited divestitures, discontinuations, supply interruptions and foreign exchange as additional offsets.
- Operating expenses increased 61% to $1,529.6 million. Amortization and impairment expense was $355.2 million; restructuring, integration and other costs were $133.6 million.
- Interest expense increased to $246.5 million from $155.3 million, mainly reflecting higher debt after the B&L acquisition. A $93.7 million loss on extinguishment of debt followed February refinancing; this contributed to the small pretax profit of $4.8 million becoming a net loss after tax.
- Other income of $43.3 million included reversal of a $50.0 million reserve for AntiGrippin litigation after an appeal ruling in the company’s favor. The decision remained subject to possible further appeal.
- Cash from operations improved, but cash was used for acquisitions, debt repayments, capital spending, integration costs and employee withholding taxes.
Outlook, commentary, risks and unusual items
- Management expected to achieve more than $900 million of annual B&L cost synergies by the end of 2014; estimated related costs were approximately 60% of those synergies, with initiatives expected to be substantially completed by year-end. Medicis synergies were reported at more than $300 million on a run-rate basis as of December 31, 2013.
- The filing provides no specific consolidated revenue or earnings guidance. Management expected continuing generic erosion for Zovirax ointment, Vanos, Retin-A Micro and Wellbutrin XL (Canada), while anticipating growth elsewhere and from acquisitions.
- In February, the company refinanced approximately $2.95 billion of Series E term loans and issued $225.6 million of incremental Series A-3 term loans. Variable-rate debt was $7.8 billion; management estimated a 100-basis-point rate increase would add approximately $51.4 million to annual pretax expense and cash flows.
- Management said existing cash and operating cash generation should cover current liquidity needs and near-term debt maturities. It also disclosed approximately $125 million of commitments for property and equipment and acknowledged that further acquisitions could require additional debt, equity or asset sales.
- On April 22, 2014, after quarter-end, Valeant proposed acquiring Allergan for $48.30 cash and 0.83 Valeant shares per Allergan share; financing commitments of $15.5 billion were reported. No merger agreement had been signed, and completion was uncertain. A separate $475 million cash acquisition of PreCision Dermatology, plus a possible $25 million milestone payment, was expected to close in Q2 2014.
- Material risks include substantial leverage and interest-rate exposure; generic competition; acquisition integration and realizing synergies; product, regulatory and intellectual-property matters; foreign exchange and international operations; and litigation. The filing discusses, among other matters, Solodyn antitrust claims, product and patent disputes, and legacy B&L product-liability cases. Outcomes and potential losses were often not estimable.
- Disclosure controls were deemed effective. The company reported material changes to internal financial controls during Q1 as U.S. operations migrated to B&L’s ERP system and shared-service center.
Key facts for investors to verify
- How much of reported growth and cash generation is sustainable in the existing business versus attributable to acquisitions and working-capital timing.
- Progress toward B&L’s greater-than-$900-million annual synergy target, remaining integration costs, and the effect on margins and cash flow.
- Debt repayment capacity, refinancing terms, covenant headroom, and sensitivity to variable interest rates given approximately $17.4 billion of debt.
- Sales trends and generic erosion in the named products, alongside performance of acquired businesses and new product launches.
- Developments in the Allergan proposal, PreCision transaction, AntiGrippin appeal and other litigation or regulatory matters.
- Whether the ERP and shared-service integration affects transaction processing or reporting controls after the disclosed material changes.