Valeant Pharmaceuticals International, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 5, 2011. The filing is by Valeant Pharmaceuticals International, Inc., the company formed when Biovail acquired Valeant in September 2010—not under the later Bausch Health name. Amounts are U.S. dollars.
Business context: Specialty pharmaceutical company focused on neurology, dermatology and branded generics. The 2011 results include Valeant and, from its March acquisition date, PharmaSwiss; the 2010 comparison does not include Valeant. Accordingly, reported growth is substantially acquisition-driven and is not a like-for-like measure of organic growth.
Financial results and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $609.4 million | $238.8 million | $1,174.4 million | $458.4 million |
| Operating income | $118.5 million | $48.8 million | $193.2 million | $65.2 million |
| Net income | $56.4 million | $34.0 million | $62.8 million | $30.8 million |
| Diluted EPS | $0.17 | $0.21 | $0.19 | $0.19 |
| Operating cash flow | $226.7 million | $108.9 million | $313.0 million | $153.7 million |
- Q2 revenue rose 155% and first-half revenue rose 156%; management attributed much of the increase to Valeant and PharmaSwiss operations acquired since the prior-year comparison. First-half PharmaSwiss revenue since acquisition was $81.6 million.
- Q2 operating margin was approximately 19.4%, versus 20.4% in Q2 2010. Q2 net margin was approximately 9.2%, versus 14.2%. First-half operating and net margins were approximately 16.4% and 5.4%, respectively. These comparisons are affected by the merger and acquisitions.
- Cash and cash equivalents were $238.9 million at June 30, down from $394.3 million at year-end 2010. Current assets were $1.046 billion and current liabilities $761.9 million.
- Long-term debt, including current maturities, was $4.547 billion, up 26% from $3.595 billion at year-end. Net financial liabilities were $4.296 billion. First-half capital expenditures were $34.0 million; operating cash flow was $313.0 million.
- Total assets were $11.828 billion; shareholders’ equity was $4.665 billion. No dividend was declared or paid in the first half of 2011.
Material changes and notable items
- Acquisitions and product rights expanded the business: PharmaSwiss for reported total consideration of $518.7 million; U.S. and Canadian Zovirax rights for $300.0 million; and Elidel/Xerese rights, with fair-value consideration of $437.7 million. First-half cash used for businesses and intangible assets was $871.2 million.
- Operating cash flow increased to $313.0 million, while investing cash outflow rose to $887.8 million, largely due to acquisitions. Financing cash flow was positive $412.6 million, including senior-note proceeds.
- Q2 interest expense was $83.1 million, versus $10.0 million a year earlier. Q2 also included a $14.7 million debt-extinguishment loss, a $21.3 million realized gain on the Cephalon investment, and a $12.6 million income-tax recovery.
- Merger-related restructuring and integration costs were $27.6 million in Q2 and $45.2 million in the first half. Acquisition inventory accounting added $16.3 million to Q2 cost of goods sold and $46.2 million for the first half.
- During the first half, the company issued $2.15 billion of senior notes, repaid a $975 million term loan, repurchased shares for $499.6 million and repurchased convertible notes for $344.0 million. The 4.0% convertible notes were converted into 17.8 million common shares.
Outlook, risks and contingencies
- Management expected to realize approximately $350 million in annual cost synergies by the end of 2012, with more than $300 million expected in 2011. It reported $158 million realized in the first half. Estimated restructuring and integration costs were up to $180 million, including approximately $55 million non-cash.
- Management expected the combined cash tax rate to be below 10% for 2011. It also said it intended to raise approximately $1.0 billion of debt to finance the proposed Sanitas, Dermik and Ortho Dermatologics transactions.
- Management anticipated a $15–30 million one-time Q3 2011 revenue impact from reducing wholesaler inventory. It anticipated continuing Wellbutrin XL sales declines from generic competition. Potiga’s U.S. launch depended on DEA controlled-substance classification; management anticipated no launch earlier than Q4 2011.
- Proposed acquisitions were subject to closing conditions and approvals. Sanitas was expected to close in Q3 with a tender offer in Q4; Dermik and Ortho Dermatologics were expected to close before year-end. Completion was not assured.
- Risks include integration and rapid growth, high debt and refinancing needs, generic competition, acquisition execution, product and regulatory approvals, foreign exchange and interest-rate exposure, and litigation. The filing describes multiple patent, antitrust, tax and other legal matters; outcomes and potential losses were generally not predictable. The company reported compliance with revolving-credit covenants at June 30.
Investor verification priorities
- Separate acquired revenue and acquisition accounting effects from underlying organic growth and recurring profitability.
- Reconcile debt, interest burden, cash generation and planned borrowing against acquisition funding needs and credit covenants.
- Track delivery of stated synergy targets against integration costs and the company’s expected 2011 cash tax rate.
- Verify timing, financing and closing conditions for Sanitas, Dermik and Ortho Dermatologics, and the forecast Q3 inventory-related revenue reduction.
- Monitor generic erosion, Potiga’s controlled-substance scheduling and launch, material litigation, and unresolved tax positions.