Valeant Swings to Loss on Impairment Charges on Acquisitions

Revenues fell 11% Y-o-Y to $2.48 billion due to a decline in overall product sales

v1Valeant Pharmaceuticals International Inc. (NYSE: VRX) announced its Q3 FY16 financial results on November 8th, 2016.

The Laval, Quebec-based company develops, manufactures, and markets pharmaceuticals, over-the-counter products, and medical devices worldwide. The company’s products include Xifaxan for the treatment of irritable bowel syndrome with diarrhea; Wellbutrin XL for major depressive disorder in adults; as well as Ziana, Clindagel, Acanya, Atralin, Retin-A Micro, and ONEXTON gel. In addition, the company offers Ocuvite, a lutein eye vitamin and mineral supplement; Boston, a cleansing solution for gas permeable contact lenses. v2Valeant operates under three main segments: Bausch & Lomb/International, Branded Rx, and U.S. Diversified Products. Read more about Valeant’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Valeant’s total revenues fell 11% Y-o-Y to $2.48 billion from $2.79 billion in the year-ago period, due to a decline in product sales in its existing business and negative impact from currency as well as divestitures and discontinuations. However, acquisitions completed in 2015 provided some top-line support.

During the reporting quarter, Valeant’s cost of goods sold (COGS) grew 2% to $649 million from $635 million in the year-ago period, primarily due to an increase related to acquisitions completed in 2015, as well as costs associated with the voluntary recall of PeroxiClear, partially offset by a decline in sales volumes and decreases related to divestitures and discontinuations. COGS rose to 26% of total revenues in Q3 FY16 compared to 23% in the same period in 2015, due to unfavorable foreign exchange, the impact of unfavorable product mix, lower neurology revenues due to generic competition, and lower dermatology revenues. Those factors were partially offset by a favorable sales impact from certain products acquired in the Salix acquisition in 2015.

Selling, General, and Administrative (SG&A) expenses fell 5% to $37 million compared to $698 million in the year-ago period. As a percentage of total revenues, SG&A rose to 27% compared to 25% in the same period last year. R&D expenses were flat at $101 million in Q3 FY16.

Hit by higher costs and lower product sales in Q3 FY16, Valeant swung to a net loss of $1.22 billion compared with a profit of $49.5 million in the same quarter last year, after it was forced to take a $1.05 billion goodwill impairment charge on some of its U.S. businesses. Adjusted EPS came in at $1.55 compared to $2.41 a share last year and below expectations of $1.76 a share, on lower product sales.

Segmental highlights

v3Bausch & Lomb/International: This segment’s Q3 FY16 revenues grew 4% to $1.16 billion from $1.12 billion in the year-ago period. The segment accounted for 47% of total company revenues, driven by an increase in product sales revenues of $67 million in Q3 FY16 from all 2015 acquisitions, partially offset by a $4 million decline in product sales revenues from existing businesses.

Branded Rx: This segment’s Q3 FY16 revenues fell to $847 million from $1.1 billion in the year-ago period. The segment accounted for 34% of total company revenues; and this reflects the decline in product sales revenue from its existing business of $251 million in Q3 FY16. The gap was primarily a result of lower average realized prices resulting from higher managed care rebates in dermatology and Salix, lower price appreciation credits in dermatology and Salix, and changes in the fulfillment model which led to reduced volumes.

Wholesaler inventory levels at Salix were reduced to approximately 1.5 months as of September 30th, 2016, consistent with the overall inventory levels at U.S. wholesalers for branded products (excluding generic products).

U.S. Diversified Products: This segment’s Q3 FY16 revenues fell to $471 million from $564 million in the year-ago period. The segment, which contributed 19% of total company revenues, reflected a decline in product sales revenue from existing business of $92 million, mainly due to generic competition.

Other highlights

Cash flow: During Q3 FY16, Valeant’s GAAP cash flow from operations was $570 million versus $733 million in the year-ago period.

New management additions: Valeant announced the hiring of two key senior executives: Paul Herendeen, Chief Financial Officer, and Dr. Louis Yu, Chief Quality Officer. Paul Herendeen joined the company in August 2016 and Dr. Louis Yu in October 2016.

Source: Valeant
Source: Valeant

Sale of Salix stomach-drug unit: On November 2nd, 2016, Valeant announced that it is in talks with third parties, v5including Japan’s Takeda Pharmaceutical Co Ltd, to sell its Salix stomach-drug unit for $10 billion. Valeant acquired Salix in 2015 for $14.5 billion. Salix Pharmaceuticals makes treatments for disorders such as irritable bowel syndrome and diarrhea. The proceeds from the sale would likely be used to pay down the majority of Valeant’s roughly $12 billion in loans. Valeant, which has a market value of $6 billion, has massive debts of about $30 billion. Hence, management is looking to selling around $8 billion in non-core assets to help pay down debt that it accumulated over the course of a series of large acquisitions. Valeant is also exploring a sale of its eye-surgery equipment business, which could fetch as much as $2.5 billion.

Guidance for full year FY16

Valeant slashed its full-year FY16 guidance and now expects total revenue to be in the range of $9.55 billion to $9.65 billion compared to the previous projection range of $9.9 billion to $10.1 billion. Adjusted EPS is now expected to be between $5.30 and $5.50. The previously expected range was $6.60 to $7.00. Adjusted EBITDA is now expected in the $4.25 billion to $4.35 billion range. The previously expected range was $4.80 billion to $4.95 billion.

Source: Valeant
Source: Valeant

Stock Performance

Valeant has been struggling to prop up its plunging share price since last year, when the company received bad press relating to its drug pricing practices and its ties with specialty pharmacy Philidor. Its stock is down around 90% since its 2015 highs. Moreover, some of its drugs, losing exclusivity, could face potential generic competition, prompting management to lower guidance for FY16. All these factors combined have hammered down Valeant’s stocks to low levels.

v7Valeant’s stock stood at $17.86, losing 1.98%, at the close on Wednesday, November 16th, 2016, having vacillated between an intraday high of $18.44 and a low of $17.70 during the session. The stock’s trading volume was at 13,308,734 for the day. The Company’s market cap was at $6.24 billion as of Wednesday’s close.

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