Business context and reporting period
This filing is Valeant Pharmaceuticals International, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012; it is not filed under the name Bausch Health Companies Inc. Valeant described itself as a multinational specialty pharmaceutical company focused on dermatology, neurology, branded generics and over-the-counter products. The company’s acquisition-led expansion continued during the period, including OraPharma and several other businesses acquired in 2012. Figures below are in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $820.1 million, up 35% from $609.4 million | $1.676 billion, up 43% from $1.174 billion |
| Operating income | $86.8 million, down from $118.5 million | $148.3 million, down from $193.2 million |
| Net income (loss) | $(21.6) million, versus $56.4 million income | $(34.5) million, versus $62.8 million income |
| Diluted earnings (loss) per share | $(0.07), versus $0.17 | $(0.11), versus $0.19 |
| Operating cash flow | $254.6 million, up 34% | $421.8 million, up 52% |
Operating margin was approximately 10.6% in Q2 2012 versus 19.4% a year earlier; for the first half it was 8.8% versus 16.4%. Net margin was approximately (2.6)% in Q2 and (2.1)% for the first half, compared with positive margins in the prior-year periods. The filing does not present a single consolidated gross-margin measure; cost of goods sold was $197.3 million in Q2 and $426.7 million in the first half, excluding intangible amortization.
At June 30, 2012, cash and cash equivalents were $395.3 million, total debt including current maturities was $7.551 billion, and net financial liabilities were $7.161 billion. Current assets were $1.630 billion and current liabilities were $1.049 billion. Debt increased 14% from year-end 2011. The company reported compliance with its debt covenants and said cash, operating cash generation and available credit facilities were expected to meet current liquidity needs. It also disclosed a July 2012 $100 million increase in Term Loan B commitments.
Material changes versus the prior comparable period
- Revenue growth was driven substantially by acquisitions: management attributed $185.1 million of Q2 and $425.0 million of first-half incremental product sales to 2011 acquisitions, with additional contributions from 2012 acquisitions. Existing-business growth also contributed, while foreign exchange and generic competition were drags.
- U.S. Neurology and Other revenue declined 4% in Q2 and 7% in the first half. Sales of Cardizem CD, Wellbutrin XL, Ultram ER and Diastat fell 34% in Q2 and 36% in the first half, in aggregate, due to generic competition.
- Intangible amortization rose to $210.6 million in Q2 and $411.2 million in the first half, primarily reflecting acquired assets and the commencement of amortization for ezogabine/retigabine.
- Interest expense increased to $100.6 million in Q2 and $202.6 million in the first half. The company also recorded $53.6 million of Q2 legal settlements, mainly for an antitrust settlement, and $13.9 million of Q2 acquisition-related costs.
- Q2 2011 included a $21.3 million gain on the sale of the company’s Cephalon investment and a $40 million Trobalt milestone; Q2 2012 instead included a $45 million Potiga milestone. Such items affect period-to-period comparability.
Outlook, commentary, risks and unusual items
- Management reported approximately $350 million of annual merger-related cost synergies realized as of June 30, 2012. Estimated merger-related integration costs were up to $200 million, of which $195.7 million had been incurred by period-end. Additional restructuring and integration activity, including acquisition integration, remained a source of expense.
- No specific revenue or earnings guidance was provided in the supplied filing text. The company expected continued generic erosion in certain products, including the named neurology brands and Cesamet, while anticipating growth in other businesses and recent acquisitions. It stated it did not intend to pay dividends in the foreseeable future.
- The company had agreed to a $49.25 million settlement of Wellbutrin XL antitrust claims, plus up to $0.5 million for notice costs; court approval was pending. Other disclosed proceedings included patent disputes and regulatory or civil matters whose outcomes could not be predicted or quantified clearly from the filing.
- Key stated risks included acquisition execution and integration, competition and generic challenges, product and regulatory outcomes, litigation, foreign exchange and interest-rate exposure, and the ability to service substantial debt. Moody’s had downgraded the senior secured debt rating to Ba1 in January 2012; management cautioned that further downgrades could raise borrowing costs. A 100-basis-point increase in rates was estimated to add approximately $27.3 million to annualized pretax expense on current variable-rate debt.
- Other notable items: the company announced redemption of its outstanding 5.375% convertible notes for August 2, 2012; it expected the pending Natur Produkt acquisition, valued at approximately $180 million plus potential milestones, to close by year-end subject to conditions and approvals; and it filed an FDA citizen petition regarding acyclovir ointment approval requirements.
Important facts for investors to verify
- How much of reported growth and future performance depends on acquired businesses, and whether acquisitions deliver expected synergies without further integration costs.
- The trajectory of generic erosion in legacy products and the commercial contribution of newer products, including Potiga and acquired brands.
- Debt repayment capacity, interest-rate sensitivity, covenant headroom, and the implications of the debt-rating downgrade and subsequent borrowing.
- The final court approval and payment terms of the antitrust settlement, as well as outcomes of significant patent, regulatory and other legal matters.
- Whether provisional acquisition valuations, intangible-asset amortization assumptions and any impairment assessments change materially.
- Completion and financing of the Natur Produkt transaction, and the effect of foreign exchange, tax positions and the announced corporate restructuring.