Valeant Pharmaceuticals International, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011; amounts are U.S. dollars. Valeant was a multinational specialty pharmaceutical company focused principally on neurology, dermatology and branded generics. The registrant was then Valeant Pharmaceuticals International, Inc. (formerly Biovail); the filing is not a 2011 filing by a company named Bausch Health. Comparisons with 2010 are not like-for-like: the 2010 results included Valeant only from the September 28, 2010 merger date, while 2011 includes acquired businesses only from their respective acquisition dates.
Key financial results
| Metric | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2011 | Comparable 2010 |
|---|---|---|---|
| Revenue | $600.6 million | $1,775.0 million | $208.3 million; $666.7 million |
| Operating income (loss) | $112.4 million | $305.6 million | $(126.3) million; $(61.1) million |
| Net income (loss) | $40.9 million | $103.7 million | $(207.9) million; $(177.1) million |
| Diluted EPS | $0.13 | $0.32 | $(1.27); $(1.11) |
| Operating cash flow | $173.7 million | $486.7 million | $110.9 million; $264.6 million |
- Revenue rose 188% in the quarter and 166% year to date, substantially reflecting the merger and acquisitions, including PharmaSwiss and Sanitas, rather than solely organic growth. Segment revenues also benefited from Trobalt milestone revenue, the Cloderm out-license and product performance.
- Operating margins were approximately 18.7% for the quarter and 17.2% year to date; net margins were approximately 6.8% and 5.8%, respectively. These ratios reflect acquisition-related accounting and the limited comparability of the periods.
- Interest expense was $87.5 million for the quarter and $239.3 million year to date, up materially from 2010, primarily due to assumed and newly issued debt. Amortization of intangible assets was $138.0 million and $365.0 million, respectively.
- Nine-month operating cash flow increased to $486.7 million. Investing activities used $1,330.5 million, mainly for acquisitions and product rights; financing activities provided $711.6 million. Cash declined $139.7 million from year-end 2010.
- At September 30, cash and equivalents were $254.6 million; current assets were $1,099.1 million and current liabilities $862.7 million. Long-term debt, including current maturities, was $5,226.9 million, versus $3,595.3 million at December 31, 2010. Net financial liabilities were $4,969.4 million. The filing reported covenant compliance at quarter-end.
- Total assets were $11,818.4 million and shareholders’ equity $4,014.1 million. No dividends were declared or paid in the first nine months of 2011.
Material changes versus the prior comparable period
- The 2011 results include acquisitions and product transactions that were absent or only partly reflected in the 2010 comparison. Acquisitions and rights transactions included PharmaSwiss, Sanitas, Zovirax, and Elidel/Xerese; Valeant’s operations were included in 2010 only after the merger date.
- Management attributed earnings improvement to the larger acquired revenue base, higher Xenazine and Zovirax contribution, lower restructuring costs and fewer legal-settlement charges than in 2010. These benefits were partly offset by higher amortization and interest expense, integration and acquisition costs, and debt-extinguishment losses.
- Wellbutrin XL sales fell 25% in Q3 and 14% year to date, with generic competition cited as the principal reason. Xenazine sales increased 33% in Q3 and 53% year to date; Zovirax sales increased 50% and 22%, respectively.
- Equity declined 18% from year-end, affected by share and convertible-note repurchases, the settlement of convertible notes in shares, and a $287.6 million foreign-currency translation loss.
Outlook, risks and unusual items
- Management targeted approximately $350 million of annual merger synergies by the end of 2012, with more than $300 million expected in 2011; it reported $236.7 million realized in the first nine months. Estimated merger-related rationalization and integration costs were up to $180 million, including an estimated $55 million non-cash component.
- The FDA approved Potiga, but launch depended on DEA controlled-substance scheduling, which remained under review at September 30. Management anticipated no U.S. launch before at least Q1 2012 and expected higher Q4 2011 pre-launch SG&A. Trobalt had launched in Europe and generated a $40 million milestone.
- After quarter-end, the company entered into a $2.0 billion senior secured credit-facility package and used an initial $1.2 billion draw in part to repay the quarter-end Bridge and revolving borrowings. It expected Dermik and Ortho Dermatologics acquisitions to close before year-end, subject to approvals; both had received FTC requests for additional information. It also acquired control of Afexa in October 2011.
- A new securities repurchase program of up to $1.5 billion was announced for November 2011 through November 2012. Repurchases are discretionary and subject to market conditions, financing restrictions and other considerations.
- Key risks include substantial debt and interest obligations, refinancing and cash-flow needs, acquisition integration and realization of synergies, generic competition and patent challenges, product/regulatory risks, foreign-exchange exposure, tax positions and litigation. The filing describes ongoing Wellbutrin XL antitrust class actions and numerous patent and other legal matters; outcomes and potential losses were generally not estimable.
- Other notable items include a $21.3 million gain on the sale of Cephalon shares, $33.3 million in nine-month debt-extinguishment losses, acquisition contingent consideration and significant purchase-accounting amortization. The filing identifies no material change to risk factors or market-risk exposures and states that disclosure controls were effective.
Important facts for investors to verify
- Assess how much of revenue and earnings growth reflects acquired operations and one-time milestones versus organic growth; account for the non-comparable 2010 base.
- Review debt maturities, post-quarter refinancing terms, facility draws, covenants, interest costs and the capacity to fund planned acquisitions and repurchases.
- Track realization and cash cost of merger synergies, integration expenses, and amortization or impairment of acquired intangible assets and goodwill.
- Monitor generic erosion of Wellbutrin XL, DEA scheduling and commercialization of Potiga, and performance of recently acquired products and businesses.
- Follow FTC review and closing of the Dermik and Ortho transactions, Afexa’s subsequent acquisition process, and material developments in litigation, tax audits and contingent obligations.