Valeant Pharmaceuticals International, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The filing is by Valeant Pharmaceuticals International, Inc., not a registrant named Bausch Health Companies Inc.; Bausch & Lomb was acquired after quarter-end.
Business context
Valeant was a multinational specialty pharmaceutical company focused on eye health, dermatology, neurology, branded generics, OTC products and medical devices. Results reflected substantial acquisition activity, including Medicis in December 2012 and Obagi, Eisai product rights and Natur Produkt in the first half of 2013. Bausch & Lomb was acquired on August 5, 2013, after the reporting period.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $1,095.8 million | $820.1 million | $2,164.1 million | $1,676.2 million |
| Operating income | $141.5 million | $86.8 million | $258.5 million | $148.3 million |
| Net income (loss) | $10.9 million | $(21.6) million | $(16.7) million | $(34.5) million |
| Diluted EPS | $0.03 | $(0.07) | $(0.05) | $(0.11) |
| Cash from operations | $305.0 million | $254.6 million | $560.4 million | $421.8 million |
- Q2 revenue rose 34%; first-half revenue rose 29%. Management attributed most of the increase to acquired businesses, with additional growth in existing products, partly offset by generic competition and lower alliance revenue.
- Operating expenses were $954.2 million in Q2 and $1,905.6 million in the first half. Amortization was $303.6 million and $629.8 million, respectively. Product costs of goods sold, excluding amortization, were 25.8% of revenue in Q2 and 26.2% in the first half; reported comparisons were affected by acquisition-related inventory accounting.
- Interest expense increased to $176.8 million in Q2 and $332.1 million in the first half, from $100.6 million and $202.6 million, respectively. First-half results also included a $21.4 million loss on debt extinguishment.
- Cash and cash equivalents were $2,539.4 million at June 30, up from $916.1 million at year-end, principally reflecting $2,271.3 million of net equity proceeds raised for the planned Bausch & Lomb acquisition.
- Total debt, including current maturities, was $10,794.1 million, down from $11,015.6 million at December 31, 2012. Net financial liabilities were $8,254.7 million. The company reported compliance with debt covenants and said available cash and operating cash flow were expected to meet current liquidity needs.
- Cash used in investing activities was $766.6 million in the first half, mainly reflecting acquisitions. Cash provided by financing activities was $1,840.2 million, including the equity issuance.
Changes and management commentary
- Developed Markets revenue increased 37% in Q2 and 31% for the first half; Emerging Markets revenue increased 26% and 25%, respectively. Segment profit rose in Developed Markets but fell 31% in Emerging Markets in Q2.
- Growth from acquisitions and core dermatology brands was partly offset by generic erosion in BenzaClin, Cesamet and Zovirax. Management anticipated continued declines in Cesamet and BenzaClin; Zovirax ointment sales could decline materially following generic entry.
- Valeant identified approximately $300 million of annual run-rate cost synergies from the Medicis acquisition, targeted by the end of 2013. It had incurred $161.3 million of related restructuring, acquisition and integration costs through June 30 and expected total costs to be significantly below estimated annual synergies.
- The Bausch & Lomb acquisition was completed August 5 for an aggregate purchase price described as $8.7 billion, less specified debt and other adjustments. It was financed through new debt and equity. Valeant cited approximately $800 million of expected Bausch & Lomb synergies; realization, timing and integration were uncertain.
Outlook, risks and unusual items
- The filing did not provide formal revenue or earnings guidance. Management discussed the synergy targets above and expected increased interest expense following financing for the Bausch & Lomb acquisition.
- Unusual or notable charges included $26.1 million of impairment on certain Australian suncare and skincare brands, a $22.2 million Opana write-off after production issues halted launch plans, and $19.4 million of product write-offs in Brazil, Canada and Poland.
- Ezogabine/retigabine assets had substantial carrying values; management warned that FDA labeling or risk-management changes could affect future sales and that impairment could be material. An FDA complete response letter delayed the expected efinaconazole launch to 2014.
- Risks included substantial debt and floating-rate exposure, acquisition integration and synergy execution, generic competition, product and regulatory outcomes, foreign exchange, and litigation. The filing described a new Solodyn antitrust investigation/class-action exposure and other patent, shareholder, product and commercial disputes; outcomes or losses were generally not predictable.
- A 100-basis-point increase in rates was estimated to reduce annual pre-tax earnings and cash flow by approximately $31.0 million on then-current variable-rate debt. The company reported $4,425.9 million of variable-rate debt at June 30.
Important facts for investors to verify
- Post-quarter Bausch & Lomb acquisition financing, resulting debt, interest burden and integration performance; the transaction was not included in June 30 balance-sheet debt.
- Whether Medicis and Bausch & Lomb synergy targets are achieved, and the associated restructuring and integration costs.
- Organic growth and segment profitability apart from acquired revenue, acquisition accounting and one-time items.
- Generic erosion in key products, ezogabine/retigabine regulatory and commercial developments, and potential intangible-asset impairments.
- Developments in material litigation, antitrust matters and contingent liabilities, as well as cash conversion and debt covenant headroom.