Business context and reporting period
This is Valeant Pharmaceuticals International, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2015; Valeant is the historical predecessor to Bausch Health Companies Inc. The company marketed pharmaceuticals, OTC products and medical devices in more than 100 countries. On April 1, 2015, after quarter-end, it completed the approximately $16 billion enterprise-value acquisition of Salix Pharmaceuticals. Salix is therefore not included in the quarter’s reported operating results.
Financial results and liquidity
| Metric (USD millions, except per-share data) | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $2,190.9 | $1,886.2 |
| Operating income | $543.4 | $356.6 |
| Net income (loss) attributable to Valeant | $73.7 | $(22.6) |
| Diluted EPS | $0.21 | $(0.07) |
| Cash from operating activities | $491.1 | $484.3 |
- Operating margin was approximately 24.8%, compared with 18.9% a year earlier. Interest expense was $297.8 million; income tax expense was $80.9 million.
- Net cash used in investing was $11.24 billion, largely reflecting $10.35 billion transferred into restricted cash for the Salix transaction, as well as acquisitions. Financing provided $12.31 billion. Ending cash and cash equivalents were $1.86 billion.
- At March 31, total debt carrying value was $26.02 billion, including $25.90 billion of long-term debt and $122.8 million current portion, versus $15.25 billion of total debt at year-end. Total liabilities were $31.99 billion.
- Restricted cash was $10.35 billion, primarily escrowed Salix financing proceeds—not ordinary unrestricted operating cash. The company said it believed cash and operating cash generation would meet current liquidity needs and reported compliance with debt covenants at quarter-end.
Material changes versus the prior period
- Revenue grew 16%. Management attributed the increase to $220 million of incremental sales from 2014 and 2015 acquisitions and $278 million of growth in the remaining existing business, partly offset by $136 million of foreign-exchange headwind on existing business and $71 million from divestitures and discontinuations.
- Developed Markets revenue increased 24% to $1.76 billion; Emerging Markets revenue declined 8% to $426.5 million, with foreign exchange a significant drag in both markets.
- Net product-sales deductions rose to $1.10 billion, or 34% of gross product sales, from $599.4 million, or 24%. The filing cites higher rebates, chargebacks and returns, including launch-related programs and U.S. government rebates.
- Operating expenses increased 8% to $1.65 billion. SG&A rose 19% to $573.8 million, while restructuring, integration and other costs fell to $55.0 million from $133.6 million. The prior-year period included a $43.3 million other-income benefit, primarily reversal of an AntiGrippin litigation reserve.
- Net income improved from a loss, but Q1 2015 included $72 million of Salix commitment-letter financing costs in interest expense, a $20 million debt-extinguishment loss, and foreign-exchange and other losses of $71.1 million.
- Foreign-currency translation reduced other comprehensive income by $411.5 million, contributing to comprehensive loss of $337.4 million despite positive net income.
Outlook, management commentary, risks and unusual items
- The filing provides no consolidated numeric revenue or earnings guidance. Management said future interest expense was expected to rise following Salix-related financing.
- Management targeted reducing wholesaler inventories of certain Salix products from approximately five to nine months to 1.5 months by or before year-end 2015. Selling below anticipated end-user demand to reach that target was expected to reduce revenue and cash flow; inaccurate inventory or demand estimates could extend the impact.
- Salix was funded with new debt, equity and cash. At quarter-end, $10.35 billion of proceeds were restricted in escrow; the acquisition closed April 1. In April, $4.15 billion of incremental term loans were drawn and a further $1.00 billion facility remained undrawn as of April 30. The debt burden, integration, synergy delivery and inventory normalization are material execution risks.
- Management reported more than $900 million of annual run-rate cost synergies identified for the Bausch & Lomb acquisition, substantially achieved by the end of 2014. It estimated approximately $600 million of associated cost-rationalization and integration costs, with further costs possible.
- Salix-related risks include an SEC investigation into inventory disclosures and related accounting, securities litigation, and potential consequences of its historical financial reporting and control weaknesses. The company also cited regulatory, product, patent, pricing, foreign-exchange, interest-rate and acquisition-integration risks.
- In an AntiGrippin trademark case, a Russian court issued an approximately $31 million award on April 9, 2015; the company said it intended to appeal and had not recorded a reserve as of March 31. Other proceedings include Solodyn antitrust litigation and product-liability matters. The filing states that outcomes or potential losses are not reasonably estimable for certain proceedings.
- Management concluded disclosure controls and procedures were effective as of March 31, 2015.
Important facts for investors to verify
- How much of reported cash is freely available, and how the escrowed Salix proceeds and acquisition funding reconcile after closing.
- Pro forma post-Salix leverage, debt service, interest expense, covenant headroom and liquidity, including the April term-loan draw.
- Whether the targeted Salix wholesaler inventory reduction was achieved and its effects on sales, cash flow and reported inventory.
- The drivers and sustainability of the increase in sales deductions as a percentage of gross sales, and the underlying organic growth after foreign exchange, acquisitions and divestitures.
- Salix’s SEC investigation, historical reporting and control matters, and the status and potential exposure of significant litigation and contingencies.
- Acquisition purchase-price allocations were provisional for Q1 acquisitions; verify subsequent fair-value adjustments, amortization, integration costs and impairment exposure.