Valeant Pharmaceuticals International, Inc. — Q1 2013 Form 10-Q
Filing identity: The filing is by Valeant Pharmaceuticals International, Inc., the company later known as Bausch Health. It covers the unaudited three months ended March 31, 2013; comparative figures are for Q1 2012. Amounts below are U.S. dollars.
Business context and reporting period
Valeant develops, manufactures and markets specialty pharmaceuticals, branded generics, over-the-counter products and medical devices, with operations in developed and emerging markets. Results reflect the December 2012 Medicis acquisition and further acquisitions during Q1 2013. The company realigned reporting into Developed Markets and Emerging Markets.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $1,068.4 million | $856.1 million; up 25% |
| Operating income | $117.0 million | $61.5 million |
| Operating margin | 11.0% | 7.2% |
| Net loss | $27.5 million; $0.09 per share | $12.9 million; $0.04 per share |
| Operating cash flow | $255.3 million | $167.2 million |
| Investing cash flow | $(234.9) million | $(218.4) million |
| Financing cash flow | $(515.9) million | $210.4 million provided |
| Cash and cash equivalents | $413.7 million | $916.1 million at Dec. 31, 2012 |
| Total debt, including current portion | $10.62 billion | $11.02 billion at Dec. 31, 2012 |
| Current assets / current liabilities | $2.37 billion / $1.65 billion | Current ratio about 1.44 |
Net loss widened despite higher operating income, primarily reflecting increased amortization, SG&A and interest expense, plus a $21.4 million debt-extinguishment loss. Interest expense was $155.3 million, up from $102.0 million. The Q1 tax recovery was $27.3 million. Segment profit was $213.8 million, or 20% of revenue, versus $178.7 million, or 21%.
Material changes versus the prior comparable period
- Revenue growth was driven chiefly by acquired businesses: management cited $269.3 million of incremental sales from 2012 acquisitions and $35.2 million from Q1 2013 acquisitions. Existing-business pricing and growth also contributed.
- Alliance revenue fell sharply, partly because Q1 2012 included $66.3 million from divestitures of IDP-111 and 5-FU. Generic competition and divestitures, discontinuations and supply interruptions also weighed on sales.
- Amortization rose $125.5 million to $326.2 million, including impairment and write-off charges. SG&A rose 36% to $241.9 million, while restructuring and integration costs declined to $49.0 million from $62.3 million.
- Operating cash flow improved, but cash fell by $502.4 million, largely due to acquisitions, debt repayments, share repurchases and debt issuance costs. Accounts receivable growth also absorbed working capital.
Outlook, risks and unusual items
- Management targeted approximately $300 million of annual run-rate Medicis cost synergies by year-end 2013, with integration initiatives expected to be substantially completed by then. It expected total related costs to be significantly less than the estimated annual synergies; $143.3 million of specified costs had been incurred through March 31, 2013.
- The filing provides no specific consolidated revenue or earnings guidance. Management said cash, operating cash flow and the undrawn revolving facility were expected to meet current liquidity needs; it was in compliance with debt covenants. It also noted that acquisitions may require additional financing or asset sales.
- Q1 included $26.1 million of impairment on skincare and suncare brands held for sale, $5.7 million for the Cortaid brand and a $22.2 million Opana intangible write-off after production issues led Valeant to suspend launch plans.
- Valeant changed revenue recognition for certain Medicis aesthetics products, including Dysport, Perlane and Restylane, to shipment to its distributor rather than shipment from the distributor to physicians. This change may affect period-to-period comparability.
- Generic erosion, product and supply risks, acquisition integration, foreign exchange and interest-rate exposure, and substantial debt were identified risks. The filing disclosed an Anacor contract claim seeking at least $215 million; Valeant disputed the claims. It also described ongoing patent, shareholder, regulatory and other litigation, with outcomes generally uncertain.
- After quarter-end, Valeant completed the approximately $440 million Obagi acquisition and agreed to sell worldwide rights to Metronidazole 1.3% for approximately $55 million plus specified milestone and royalty consideration.
Important facts for investors to verify
- How much of revenue and cash generation is attributable to acquisitions versus organic growth, and how the distributor-shipment revenue policy affects reported sales.
- Progress toward the $300 million Medicis synergy target, remaining integration costs and whether expected savings translate into improved margins.
- Debt maturities, floating-rate exposure and refinancing capacity, given $10.62 billion of debt and reduced cash balances.
- Whether generic competition, product supply issues and the disclosed impairments lead to further sales declines or asset write-downs.
- Developments in material litigation, including the Anacor dispute, and the final accounting and performance impact of the Obagi acquisition and Metronidazole transaction.