VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Valeant Pharmaceuticals Reports First Quarter 2014 Financial Results

 

05/08/2014

 

LAVAL, Quebec, May 8, 2014 /PRNewswire/ --

•2014 First Quarter Total Revenue $1.9 billion; an increase of 77% over the prior year ◦Exceeded our expectations

◦Launched 11 new products in the U.S.

◦Positive organic growth in the U.S. despite the generic impact of Zovirax and RAM coupled with the new generic entry for Vanos

◦Bausch + Lomb double-digit organic growth trend continued

 

•2014 First Quarter GAAP EPS loss of $0.07; Cash EPS $1.76, an increase of 35% over the prior year

•2014 First Quarter GAAP Operating Cash Flow $484 million; Adjusted Operating Cash Flow $636 million  ◦Adjusted operating cash flow represented over 100% of adjusted cash net income

 

Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) announces first quarter financial results for 2014.

 

"Our first quarter results demonstrate the strong, durable nature of our diversified business model," stated J. Michael Pearson, chairman and chief executive officer.  "The U.S. delivered positive organic growth this quarter, despite the negative generic headwinds of losing three of our top ten products in 2013 including our largest product.  Our Bausch + Lomb businesses continued to deliver double-digit organic growth that is well above the growth rates achieved pre-acquisition. Finally, I am particularly pleased that Valeant delivered extremely strong adjusted cash flow from operations this quarter." 

 

Valeant First Quarter Financial Results

 

Valeant's total revenues were $1.9 billion, up 77% compared to the first quarter of 2013.

 

Valeant's Developed Market revenue was $1.4 billion, up 82% as compared to the first quarter of 2013. The growth in the Developed Markets was driven by continued growth in our promoted dermatology prescription brands, our consumer, neurology and other, and oral health businesses, as well as 9% organic growth  in our Bausch + Lomb businesses. During the quarter, Valeant launched 11 new products in the U.S., including Ultra, Bausch + Lomb's new silicone hydrogel monthly contact lens which offers superior optics and comfort, Luzu, a novel topical antifungal for athlete's foot, Neotensil, a breakthrough topical product for  treating under-eye bags, and Peroxiclear, a faster acting and more comfortable peroxide-based contact lens solution.

 

Valeant's Emerging Market revenue was $464 million, up 61% as compared to the first quarter of 2013.  This increase was the result of continued double-digit growth in our legacy Latin America, Southeast Asia, South Africa businesses coupled with the addition of  the  Bausch + Lomb emerging market businesses which also achieved double-digit growth. The Emerging Market segment was negatively impacted by the modest organic growth in Central and Eastern Europe due to a market slowdown including the impact of the unrest in the Ukraine on the region. 

 

Same store organic product sales growth for Valeant was 1% in the first quarter of 2014, while pro forma organic growth was 4%. Excluding the impact of approximately $54 million in lost sales from certain generic products, including the Zovirax, Retin-A Micro and Vanos franchises in the U.S., and Wellbutrin XL in Canada, same store sales organic product sales growth was 8% and pro forma organic product sales growth for Valeant was 7%.  As mentioned in our 2014 financial guidance call, after the second quarter, the impact of recent generic entrants will be largely behind us and we expect a significant acceleration of organic growth in the last half of the year.

 

The Company reported a net loss of $23 million for the first quarter of 2014, or a loss of $0.07 per diluted share, which included restructuring, integration and other charges of $135 million primarily related to the acquisition of Bausch + Lomb.  On a Cash EPS basis, adjusted income was $600 million or $1.76 per diluted share, an increase of 35% over the prior year.

 

GAAP cash flow from operations was $484 million in the first quarter of 2014, an increase of 90% over the first quarter of 2013, and adjusted cash flow from operations was $636 million, an increase of 84% over the prior year. This increase in adjusted cash flow from operations was driven by growth across all our businesses.

 

The Company's cost of goods sold (COGS) was 26% of product sales in the first quarter of 2014, after backing out the fair value adjustment to inventory and other items related to acquisitions.

 

Selling, General and Administrative expenses were $482 million in the first quarter of 2014, or approximately 26% of revenue.  As discussed on our 2014 financial guidance call, SG&A, as a percent of revenue, was higher this quarter as Valeant launched 11 new products during the quarter, expanded both the aesthetic and oral health U.S. sales forces, and made a significant increase in  direct-to-consumer advertising for a number of our consumer products, thereby raising the level of SG&A spend from historical levels. SG&A levels are expected to continue at a similar percentage of sales in the second quarter as we complete our multiple launches and as the productivity of the new aesthetic and dental sales representatives ramps up to normalized levels before returning to historic levels over the course of the rest of the year. Research and Development expenses were $61 million in the first quarter of 2014, or approximately 3% of revenue. R&D expenses were lower than expected due to the acceleration of integration efforts that included the consolidation of the eye health and dermatology research groups that reduced fixed costs, without terminating any ongoing clinical programs.

 

 

Gio

 

[Liberty]

http://i.imgur.com/Qc3FleT.png

[Liberty]

http://mobile.bloomberg.com/news/2014-05-10/allergan-said-to-be-rebuffed-by-sanofi-j-j-as-it-seeks-bids.html

[Fat Pitch]

Looks like this deal is going hostile real quick. The CEO of Allergan values the R&D department highly and likes employing all those people. You need to drag these guys out kicking and screaming. I don't see a "white knight" coming to the rescue since the price is very high and it only makes sense if you plan on axing the R&D and firing a bunch of the employees which is what Allergan doesn't want.

 

I guess the only option left for Allergan is to destroy shareholder value by acquiring another company and bulking up. Hopefully Valeant gets the votes to remove the board before that happens. Very interesting to see this unfold.

 

[giofranchi]

Bloomberg: Allergan coming up empty in quest for white knight • 2:30 AM

 

- Sanofi (SNY), Johnson & Johnson (JNJ) and other major pharmaceutical companies have rebuffed Allergan's (ALGN) inquiries as to whether they would be interested in buying the botox maker, Bloomberg reports.

- Sanofi isn't interested, while J&J is concerned about the problems of combining the two biggest makers of breast implants in the U.S. Allergan has also approached GlaxoSmithKline (GSK) and Novartis (NVS).

- Allergan contacted the possible suitors as it's not happy with an acquisition offer of $45.7B from Valent (VRX) that is being supported by Bill Ackman's Pershing Square.

- Some of the firms that Allergan has approached would possibly buy parts of the company but not the whole business.

 

 

Gio

[original mungerville]

Interesting - I agree with Ackman that if the Allergan acquisition goes through, Valeant's stock could be at $200 - maybe in a year after the deal closes. But I think I read that ValueAct was selling a large portion of their stake in Valeant, but the source did not seem that reliable... have any of you heard the same? (Will be interesting to see where Sequoia is in their next quarterly filing as well - whether they sold any or not)

[loganc]

Interesting - I agree with Ackman that if the Allergan acquisition goes through, Valeant's stock could be at $200 - maybe in a year after the deal closes. But I think I read that ValueAct was selling a large portion of their stake in Valeant, but the source did not seem that reliable... have any of you heard the same? (Will be interesting to see where Sequoia is in their next quarterly filing as well - whether they sold any or not)

 

They are likely selling down to around 1B.  Check the 8K filing for the most recent earnings release.  There is a letter attached at the end from Mason Morfit.   

[Liberty]

Interesting - I agree with Ackman that if the Allergan acquisition goes through, Valeant's stock could be at $200 - maybe in a year after the deal closes. But I think I read that ValueAct was selling a large portion of their stake in Valeant, but the source did not seem that reliable... have any of you heard the same? (Will be interesting to see where Sequoia is in their next quarterly filing as well - whether they sold any or not)

 

They are likely selling down to around 1B.  Check the 8K filing for the most recent earnings release.  There is a letter attached at the end from Mason Morfit. 

 

Letter is last page here:

 

http://valeant.q4cdn.com/d2673257-6028-4e57-a183-690d66644189.pdf?noexit=true

[giofranchi]

Interesting - I agree with Ackman that if the Allergan acquisition goes through, Valeant's stock could be at $200 - maybe in a year after the deal closes. But I think I read that ValueAct was selling a large portion of their stake in Valeant, but the source did not seem that reliable... have any of you heard the same? (Will be interesting to see where Sequoia is in their next quarterly filing as well - whether they sold any or not)

 

They are likely selling down to around 1B.  Check the 8K filing for the most recent earnings release.  There is a letter attached at the end from Mason Morfit. 

 

Letter is last page here:

 

http://valeant.q4cdn.com/d2673257-6028-4e57-a183-690d66644189.pdf?noexit=true

 

To reiterate, we are making a portfolio management decision, not a decision about Valeant’s fundamental business, future performance or the merits of the Allergan deal. ValueAct Capital has a practice of reducing portfolio weightings in companies where we no longer serve on the board of directors. We have done this consistently since our inception in 2000. That being said, after my resignation we still plan to be large Valeant shareholders for some time.

We currently plan to hold more than $1 billion in shares and Valeant should remain one of our top positions. I wish you, your team and my board colleagues all the best and look forward to many more years of extraordinary performance.

 

 

Gio

[giofranchi]

Allergan rejects Valeant offer - 7:29 AM

•Unsurprisingly, Allergan's (AGN) BOD unanimously rejects Valeant Pharmaceuticals (VRX) unsolicited offer stating that it significantly undervalues the company, creates significant risks and uncertainties for shareholders and is not in the best interests of the company and shareholders.

•The company announces that it expects EPS growth to be 20 - 25% in 2015 supported by double digit revenue growth.

•Chairman and CEO David Pyott says, "We are confident in our ability to extend our track record, enthusiastic about the opportunities before us, and believe Allergan is well positioned  to deliver compelling value to our stockholders."

•He also believes that Valeant's business model is unsustainable.

 

 

Gio

 

[original mungerville]

thks all re ValueAct info

[giofranchi]

Actavis and Valeant settle patent fight - 8:26 AM

•Actavis (ACT) and Valeant Pharmaceuticals (VRX) settle their patent suit over Actavis' generic Acanya (clindamycin phosphate and benzoyl peroxide) Gel for the treatment of acne vulgaris.

•Under the terms of the agreement Valeant grants Actavis a license to manufacture a generic version effective July 1, 2018 or earlier under certain circumstances and contingent upon the FDA clearance of ACT's ANDA.

•According to IMS Health, Acanya generated $121M in sales over the 12-month period ending February 28, 2014.

 

 

Gio

 

[giofranchi]

http://blogs.marketwatch.com/health-exchange/2014/05/12/allergans-rejection-of-valeant-prompts-a-selloff-for-both/?mod=MW_home_latest_news

 

 

Gio

[Fat Pitch]

What are the odds that Valueact is selling out to acquire shares in Allergan to push for a merger?

[Guest wellmont]

slim....doesn't fit the profile of what they do. also they are going to pay massive tax on this gain.

[Fat Pitch]

I've been going through the financials for Valeant and I have a question about the intangibles and goodwill on the balance sheet. I think the combined total is roughly 22 billion. I understand the company has a significant portion of this tied into "durable" branded generic products with no risk of "patent cliff", but I do wonder what's the shelf life of these products?

 

Coca Cola for instance is a great example of a durable product, for the last 80+ yrs the formula has barely changed. It makes no sense to treat the write off of the intangibles and goodwill as a real charge since the economic value of this product increases slightly each year. I highly doubt the products under Valeant's umbrella has this kind of staying power. So some portion of the write-offs is a real cost that needs to be set aside to fund new products to replace the cash flows that will eventually melt away.

 

If you were to give the company the benefit of the doubt and say their products will be good for 20 years then the annualized charges will be roughly 1.125 billion. Sure there is organic growth in the generics, but eventually this will taper off after several years and what you have left is potentially a melting ice cube.

 

I want to see how other people are viewing this? Sure the free cash flow looks good now since this charge isn't being counted today, but it will become an expense down the road. I'm only asking since the liability side of the balance sheet is very real and significant.

 

[loganc]

If you were to give the company the benefit of the doubt and say their products will be good for 20 years then the annualized charges will be roughly 1.125 billion. Sure there is organic growth in the generics, but eventually this will taper off after several years and what you have left is potentially a melting ice cube.

 

How do you calculate this 1.125B number?

 

[Fat Pitch]

If you were to give the company the benefit of the doubt and say their products will be good for 20 years then the annualized charges will be roughly 1.125 billion. Sure there is organic growth in the generics, but eventually this will taper off after several years and what you have left is potentially a melting ice cube.

 

How do you calculate this 1.125B number?

 

Figured you just amortize the carrying cost of the intangibles and goodwill over 20 years (22 billion / 20years  = ~1.1 billion). This is a rough estimate of what needs to be spent to continue the products life cycle.

[loganc]

If you were to give the company the benefit of the doubt and say their products will be good for 20 years then the annualized charges will be roughly 1.125 billion. Sure there is organic growth in the generics, but eventually this will taper off after several years and what you have left is potentially a melting ice cube.

 

How do you calculate this 1.125B number?

 

Figured you just amortize the carrying cost of the intangibles and goodwill over 20 years (22 billion / 20years  = ~1.1 billion). This is a rough estimate of what needs to be spent to continue the products life cycle.

 

I don't think this is the correct way to think about it.  In my view, the very large goodwill and intangibles on the VRX balance sheet are simply a remnant of acquisition accounting.  VRX is a highly acquisitive company and purchases asset-lite businesses such that a large portion of the purchase price will be allocated to intangibles.  I don't think that necessarily means that you have to spend the exact dollar value of the intangibles to maintain the cash flows.  In fact, on a high level, I think VRX is comprised of high quality businesses that should require quite low maintenance capex and provide high returns on incremental invested capital.  So, from my point of view, the intangible replacement you are referring to would very much overstate economic reality.     

 

Generally speaking, the branded OTC and branded generic products should be quite durable (think of Band-Aid, Tylenol, etc.)  Specific to VRX, I would say the B+L brand is very durable.  To the extent the B+L brand is reflected in the intangibles, that isn't going away after 20 years or whatever.  I can't tell you exactly how much of the VRX portfolio is really durable - I think you have to make your own judgement there.

[Fat Pitch]

I understand your view point. That means you think some portion of Valeant's cash flows can continue in perpetuity with only $200 million in R&D? I'm just trying to figure out what's the realistic maintenance capex for this business model. It could very well be that only a few hundred million is required, but it seems many people in the industry are skeptics, Pyott included haha.

[AZ_Value]

I've been going through the financials for Valeant and I have a question about the intangibles and goodwill on the balance sheet. I think the combined total is roughly 22 billion. I understand the company has a significant portion of this tied into "durable" branded generic products with no risk of "patent cliff", but I do wonder what's the shelf life of these products?

 

Coca Cola for insist is a great example of a durable product, for the last 80+ yrs the formula has barely changed. It makes no sense to treat the write off of the intangibles and goodwill as a real charge since the economic value of this product increases slightly each year. I highly doubt the products under Valeant's umbrella has this kind of staying power. So some portion of the write-offs is a real cost that needs to be set aside to fund new products to replace the cash flows that will eventually melt away.

 

If you were to give the company the benefit of the doubt and say their products will be good for 20 years then the annualized charges will be roughly 1.125 billion. Sure there is organic growth in the generics, but eventually this will taper off after several years and what you have left is potentially a melting ice cube.

 

I want to see how other people are viewing this? Sure the free cash flow looks good now since this charge isn't being counted today, but it will become an expense down the road. I'm only asking since the liability side of the balance sheet is very real and significant.

 

Just logged in to say I like you sir. You're asking the correct questions.

 

I see a lot of people here just rehashing what the VRX talking points are without actually showing anything, I'm not sure many have read the 10-Ks.

If those who say that they've done in depth due diligence and that VRX is like a consumer goods company, were to be given a pop quiz (no cheating) asking what VRX top 10 (or any number) products are and then show us why they don't face patent expiration threats; I wonder if they'd be able to answer that (again no repeating talking points, we've all heard/read them but some of us like to verify).

 

I'll post my thoughts on this later tonight when I have time.

 

AZ

 

[loganc]

I understand your view point. That means you think some portion of Valeant's cash flows can continue in perpetuity with only $200 million in R&D? I'm just trying to figure out what's the realistic maintenance capex for this business model. It could very well be that only a few hundred million is required, but it seems many people in the industry are skeptics, Pyott included haha.

 

I don't know that I can make a prediction that any business will continue in perpetuity. 

 

I realize that the VRX strategy on R&D is controversial and  I think it is correct to be skeptical about it.  But, I think you need to invert the thinking of Pyott etc. that are simply saying that VRX is not sustainable because they are operating in a way that is different from everyone else.  On a fundamental level, does it make sense from a capital allocation standpoint to spend 16% or 17% of sales on R&D just like clockwork.  Or, as an alternative, does it make sense to zero base R&D and only allocate capital to R&D projects for which you can be certain that you will receive appropriate returns? 

 

The misconception is that since VRX spends less than 15% of sales on R&D, they don't spend on R&D.  I think they allocate to R&D based on the rates of return they can predict from specific projects rather than spending a larger amount simply because that is what everyone else does.  That type of capital allocation strategy makes sense to me and is blasphemous to Pyott, the bears, etc. 

 

In so far as AGN is concerned, I don't hear anyone complaining that they blew something like 2.3B in share repurchases over a 4 year period to "offset dilution" and reduced share count by only a marginal amount.  Or the fact that AGN criticizes VRX for being a "roll up" when their primary focus is "business development" (i.e. making acquisitions).  Further, AGN projects compounding EPS at something like 20% and advertised the fact that they are cutting SG&A and R&D as a percentage of revenue as a way to get there - sounds familiar.  The AGN presentation posted today seems more like a bull case for VRX as they are highlighting cost cutting and the high rates of return from line extension R&D which is precisely the kind of R&D that VRX would do.

 

 

 

[giofranchi]

I've been going through the financials for Valeant and I have a question about the intangibles and goodwill on the balance sheet. I think the combined total is roughly 22 billion. I understand the company has a significant portion of this tied into "durable" branded generic products with no risk of "patent cliff", but I do wonder what's the shelf life of these products?

 

Coca Cola for insist is a great example of a durable product, for the last 80+ yrs the formula has barely changed. It makes no sense to treat the write off of the intangibles and goodwill as a real charge since the economic value of this product increases slightly each year. I highly doubt the products under Valeant's umbrella has this kind of staying power. So some portion of the write-offs is a real cost that needs to be set aside to fund new products to replace the cash flows that will eventually melt away.

 

If you were to give the company the benefit of the doubt and say their products will be good for 20 years then the annualized charges will be roughly 1.125 billion. Sure there is organic growth in the generics, but eventually this will taper off after several years and what you have left is potentially a melting ice cube.

 

I want to see how other people are viewing this? Sure the free cash flow looks good now since this charge isn't being counted today, but it will become an expense down the road. I'm only asking since the liability side of the balance sheet is very real and significant.

 

Just logged in to say I like you sir. You're asking the correct questions.

 

I see a lot of people here just rehashing what the VRX talking points are without actually showing anything, I'm not sure many have read the 10-Ks.

If those who say that they've done in depth due diligence and that VRX is like a consumer goods company, were to be given a pop quiz (no cheating) asking what VRX top 10 (or any number) products are and then show us why they don't face patent expiration threats; I wonder if they'd be able to answer that (again no repeating talking points, we've all heard/read them but some of us like to verify).

 

I'll post my thoughts on this later tonight when I have time.

 

AZ

 

There is only one reason why amortization of goodwill might be a true cost: Mr. Pearson has paid too much for the businesses VRX has acquired.

 

There are only two ways the price paid might turn out to be too high:

1) It is too high for those businesses, as they were when VRX first acquired them,

2) It is too high because VRX is destroying the value of those businesses.

 

I find hypothesis n.1 hard to believe… therefore, we are left with hypothesis n.2:

Here the question is: is Mr. Pearson foolishly cutting costs, or is he rationalizing costs?

 

If he is foolishly cutting costs, he surely is destroying value, and by doing so it is very likely final evidence will be he has paid too much.

 

If, instead, he is rationalizing costs, the end result is that those acquired businesses will be worth a lot more in the future than when VRX first bought them.

 

Unfortunately, the answer to that question cannot be found in any 10-K or 10-Q… This is what I would do: read all the conference call transcripts of the last few years, and reason carefully on the answers provided by Mr. Pearson: if you find then even one single irrational thing, bet on the fact he is destroying value, otherwise bet on the fact amortization of goodwill is not a true cost for VRX. ;)

 

Gio

 

[giofranchi]

I don't know that I can make a prediction that any business will continue in perpetuity. 

 

I realize that the VRX strategy on R&D is controversial and  I think it is correct to be skeptical about it.  But, I think you need to invert the thinking of Pyott etc. that are simply saying that VRX is not sustainable because they are operating in a way that is different from everyone else.  On a fundamental level, does it make sense from a capital allocation standpoint to spend 16% or 17% of sales on R&D just like clockwork.  Or, as an alternative, does it make sense to zero base R&D and only allocate capital to R&D projects for which you can be certain that you will receive appropriate returns? 

 

The misconception is that since VRX spends less than 15% of sales on R&D, they don't spend on R&D.  I think they allocate to R&D based on the rates of return they can predict from specific projects rather than spending a larger amount simply because that is what everyone else does.  That type of capital allocation strategy makes sense to me and is blasphemous to Pyott, the bears, etc. 

 

In so far as AGN is concerned, I don't hear anyone complaining that they blew something like 2.3B in share repurchases over a 4 year period to "offset dilution" and reduced share count by only a marginal amount.  Or the fact that AGN criticizes VRX for being a "roll up" when their primary focus is "business development" (i.e. making acquisitions).  Further, AGN projects compounding EPS at something like 20% and advertised the fact that they are cutting SG&A and R&D as a percentage of revenue as a way to get there - sounds familiar.  The AGN presentation posted today seems more like a bull case for VRX as they are highlighting cost cutting and the high rates of return from line extension R&D which is precisely the kind of R&D that VRX would do.

 

+1

 

Good post! :)

 

Gio

[giofranchi]

But quite frankly, really, we spend a lot of time with training, and they’re just getting to know their physicians right now.

--Mr. Pearson, Q1 2014 Conference Call

 

One thing I think might be under appreciated is a competitive advantage due to “switching costs”. In aesthetics and in dentistry, for instance, physicians are used to achieving satisfactory results using some kind of products. The time needed to learn how to use new products and the initial uncertainty of results are things they obviously do not like at all.

Not only this fact gives some protection to VRX’s existing products in those markets, but VRX also invests a lot in a sale force which is trained to help physicians, when the inevitable changes finally can be postponed no longer.

 

This is no classic R&D investment, but I would argue this kind of investment might be at least as lucrative as classic R&D investment, if not more lucrative.

 

Gio