Valeant Pharmaceuticals International, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 4, 2012. The filing names Valeant Pharmaceuticals International, Inc. as the registrant, not Bausch Health Companies Inc. All figures below are U.S. dollars unless stated otherwise.
Business context and reporting period
Valeant was a multinational specialty pharmaceutical company focused on dermatology, neurology, branded generics and OTC products. Its strategy emphasized acquisitions, dispositions and partnerships in selected geographies and therapeutic areas. Q1 results reflect numerous 2011 acquisitions and the Q1 2012 acquisitions of Gerot Lannach and Probiotica. The company reorganized its reporting into four segments: U.S. Dermatology, U.S. Neurology and Other, Canada and Australia, and Emerging Markets.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $856.1 million | $565.0 million; up 52% |
| Operating income | $61.5 million | $74.7 million |
| Net income (loss) | $(12.9) million | $6.5 million |
| Basic and diluted earnings (loss) per share | $(0.04) | $0.02 |
| Operating cash flow | $167.2 million | $86.3 million |
| Investing cash flow | $(218.4) million | $(825.3) million |
| Financing cash flow | $210.4 million | $742.8 million |
| Cash and cash equivalents | $330.5 million at March 31 | $164.1 million at December 31, 2011 |
| Total assets | $13.62 billion | $13.14 billion at December 31, 2011 |
| Long-term debt, including current portion | $7.00 billion | $6.65 billion at December 31, 2011 |
| Net financial liabilities | $6.67 billion | $6.48 billion at December 31, 2011 |
Operating margin was approximately 7.2%, versus 13.2% a year earlier; net margin was approximately negative 1.5%, versus positive 1.1%. Current assets were $1.53 billion and current liabilities $957.9 million at quarter-end. The company reported $178.7 million of total segment profit, up 16%, but segment profit excludes certain corporate, restructuring and acquisition-related costs.
Material changes versus the prior comparable period
- Revenue growth primarily reflected acquired businesses and products, plus $66.3 million of alliance revenue from selling IDP-111 and 5-FU. The company cited $252.6 million of incremental revenue from acquisitions and a negative foreign-exchange impact of $16.5 million.
- Reported net results moved from income to loss. Intangible amortization rose $88.6 million to $200.6 million, restructuring, integration and other costs rose $44.8 million to $62.3 million, and interest expense rose $33.3 million to $102.0 million.
- Operating cash flow increased $80.9 million. Cash rose by $166.4 million, supported by operating cash flow, net borrowing under the new Term Loan B facility, and asset-sale proceeds; acquisitions, debt repayments and share repurchases used significant cash.
- Segment revenue grew substantially in U.S. Dermatology, Canada and Australia, and Emerging Markets, largely due to acquisitions. U.S. Neurology and Other revenue fell 10%, with generic erosion in several products including Wellbutrin XL, Ultram ER, Cardizem CD and Diastat.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management reported approximately $350 million of annual merger-related cost synergies realized by March 31, 2012. It estimated total merger integration and cost-rationalization costs of up to $200 million, with $195.7 million incurred to date. Management said available cash, operating cash generation and credit-facility availability were expected to meet current liquidity needs, while noting acquisitions could require additional financing or asset sales.
- Debt and covenants: The amended secured credit agreement includes leverage and interest-coverage tests and restrictions on additional debt, dividends, acquisitions and other actions. Valeant reported compliance with debt covenants at March 31. Moody’s had downgraded its senior secured debt rating from Baa3 to Ba1 in January 2012; management warned that higher debt could prompt further ratings pressure and increase borrowing costs.
- Acquisitions and commitments: Gerot Lannach and Probiotica purchase accounting was provisional. Subsequent transactions included the April acquisition of Pedinol, the May acquisition of Atlantis, and agreements or plans concerning University Medical and Natur Produkt, subject to stated closing conditions or approvals.
- Unusual items: The IDP-111 and 5-FU sale generated $66.3 million of alliance revenue, while the related assets’ $69.2 million carrying value was expensed. Foreign exchange and other income included a $29.0 million gain related to an intercompany loan. Q1 also included $33.0 million of inventory acquisition-accounting adjustments in cost of goods sold and a $28.6 million amortization charge for ezogabine/retigabine, which had no associated U.S. revenue in the quarter.
- Risks and contingencies: The filing highlights generic competition, acquisition integration and valuation, product development and approvals, foreign exchange and interest-rate exposure, debt service, and legal and regulatory proceedings. A Wellbutrin XL antitrust matter had a summary-judgment decision pending. Other disclosed matters include patent disputes and tax audits; outcomes or potential losses were not reliably estimable for several proceedings. Management also said a material impairment charge could result if product performance indicates impairment.
- Other: No dividends were declared, and management did not intend to pay dividends in the foreseeable future. Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and segment growth is organic versus acquisition-related, and whether acquired operations deliver expected synergies.
- The sustainability of operating cash flow after acquisition spending, debt service, integration payments and share repurchases.
- Debt balances, amortization requirements, covenant headroom, credit ratings and sensitivity to higher interest rates; the filing estimated a 100-basis-point rate increase would add about $25 million to annualized pretax expense on current variable-rate debt.
- The recoverability and useful lives of acquired intangible assets, including ezogabine/retigabine, and the risk of impairment.
- Updates on generic erosion, product approvals and the material litigation, patent and tax matters described in the filing.
- Whether provisional acquisition valuations, contingent consideration and announced or pending transactions change materially after quarter-end.