Valeant Pharmaceuticals Reports 2011 Second Quarter Financial Results

Valeant Pharmaceuticals International, Inc.

Table 1

Condensed Consolidated Statement of Income

For the Three and Six Months Ended June 30, 2011 and 2010

Three Months Ended

Six Months Ended

June 30,

June 30,

(In thousands, except per share data)

2011

2010

(a)

% Change

2011

2010

(a)

% Change

Product sales

$        530,035

$        231,245

NM

$         1,030,456

$              443,278

NM

Alliance and royalty

65,988

4,647

NM

124,402

8,996

NM

Service and other

13,364

2,879

NM

19,555

6,132

NM

Total revenues

609,387

238,771

NM

1,174,413

458,406

NM

Cost of goods sold (exclusive amortization of

  intangible assets shown separately below)

169,912

63,850

NM

339,199

122,805

NM

Cost of services

3,395

3,372

NM

6,605

6,679

NM

Cost of alliances

-

-

NM

30,735

-

NM

Selling, general and administrative ("SG&A")

149,657

45,094

NM

289,163

88,607

NM

Research and development

17,764

23,644

NM

31,434

36,221

NM

Contingent consideration fair value adjustments

1,752

-

NM

2,138

-

NM

Acquired in-process research and development

2,000

10,242

NM

4,000

61,245

NM

Legal settlements

2,000

-

NM

2,400

-

NM

Restructuring and acquisition-related costs

29,495

10,458

NM

48,541

11,071

NM

Amortization of intangible assets

114,946

33,299

NM

226,989

66,599

NM

490,921

189,959

981,204

393,227

Operating income

118,466

48,812

193,209

65,179

Interest expense, net

(81,987)

(9,718)

(149,935)

(19,357)

Loss on extinguishment of debt

(14,748)

-

(23,010)

-

Gain (loss) on investments, net

21,158

(392)

22,927

(547)

Other income, net including translation and exchange

847

667

3,654

44

Income before (recovery of) provision for income taxes

43,736

39,369

46,845

45,319

(Recovery of) provision for income taxes

(12,624)

5,400

(15,997)

14,500

Net income

$          56,360

$          33,969

$              62,842

$                30,819

Earnings per share:

Basic:

Net income

$              0.19

$              0.21

$                  0.21

$                    0.19

Shares used in per share computation

303,426

158,510

303,587

158,449

Diluted:

Net income

$              0.17

$              0.21

$                  0.19

$                    0.19

Shares used in per share computation

331,369

161,019

332,130

160,115

(a) Prior year amounts have been modified to conform to the 2011 disclosure.

Valeant Pharmaceuticals International, Inc.

Table 2

Reconciliation of GAAP EPS to Adjusted Non-GAAP (Cash) EPS

For the Three and Six Months Ended June 30, 2011 and 2010

Three Months Ended

Six Months Ended

June 30,

June 30,

(In thousands, except per share data)

2011

2010

2011

2010

(a)

Net income

$   56,360

$ 33,969

(a)

$   62,842

$   30,819

Non-GAAP adjustments (b)(c):

Inventory step-up (d)

16,262

-

46,171

-

Alliance product assets & pp&e step-up (e)

275

-

19,340

-

Stock-based compensation step-up (f)

16,070

-

39,407

-

Contingent consideration fair value adjustments

1,752

-

2,138

-

Restructuring, integration and acquisition-related costs (g)

29,495

10,458

48,541

11,071

Acquired in-process research and development

2,000

10,242

4,000

61,245

Legal settlements

2,000

-

2,400

-

Amortization and other non-cash charges

116,869

35,950

231,397

72,078

184,723

56,650

393,394

144,394

Amortization of deferred financing costs, debt discounts and ASC 470-20 (FSP APB 14-1) interest

3,138

4,169

6,348

8,282

Loss on extinguishment of debt

14,748

-

23,010

-

(Gain) loss on investments, net

-

392

(1,769)

547

Tax

(18,724)

700

(38,497)

5,000

Total adjustments

183,885

61,911

382,486

158,223

Adjusted income

$ 240,245

$ 95,880

$ 445,328

$ 189,042

GAAP earnings  per share - diluted

$       0.17

$     0.21

$       0.19

$       0.19

Adjusted Non-GAAP (Cash) earnings per share - diluted

$       0.73

$     0.60

$       1.34

$       1.18

Non-GAAP benefit from the out-license of Cloderm (e)

$       0.06

Adjusted Non-GAAP (Cash) earnings per share - diluted (excluding the Non-GAAP

   benefit from the out-license of Cloderm) (e)

$       1.28

Shares used in diluted per share calculation - Adjusted Non-GAAP (Cash) earnings per share

331,369

161,019

332,130

160,115

(a) Prior year non-GAAP adjustments have been modified to conform to the 2011 disclosure.

(b) To supplement the financial measures prepared in accordance with generally accepted accounting principles (GAAP), the company uses non-GAAP financial measures that exclude certain items, such as amortization of inventory step-up, amortization of alliance product assets & pp&e step up, stock-based compensation step-up, contingent consideration fair value adjustments, restructuring, integration and acquisition-related costs, acquired in-process research and development ("IPR&D"), legal settlements outside the ordinary course of business, amortization and other non-cash charges, amortization of deferred financing costs, debt discounts and ASC 470-20 (FSP APB 14-1) interest, loss on extinguishment of debt, (gain) loss on investments, net, and adjusts tax expense to cash taxes. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. By disclosing non-GAAP financial measures, management intends to provide investors with a meaningful, consistent comparison of the company’s core operating results and trends for the periods presented. Non-GAAP financial measures are not prepared in accordance with GAAP.

Therefore, the information is not necessarily comparable to other companies and should be considered as a supplement to, not a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP.

(c) This table includes Adjusted Non-GAAP (Cash) Earnings Per Share, which is a non-GAAP financial measure that represents earnings per share, excluding amortization of inventory step-up, alliance product assets & pp&e step up, stock-based compensation step-up, contingent consideration fair value adjustments, restructuring, integration and acquisition-related costs, acquired in-process research and development ("IPR&D"), legal settlements outside the ordinary course of business, amortization and other non-cash charges, amortization of deferred financing costs, debt discounts and ASC 470-20 (FSP APB 14-1) interest, loss on extinguishment of debt, (gain) loss on investments, net, and adjusts tax expense to cash taxes.

(d) ASC 805, accounting for business combinations requires an inventory fair value step-up. The impact of the amortization of this step-up is included in cost of goods sold. For the three and six months ended June 30, 2011 the total impact is $16.3 million and $46.2 million, respectively. For the three and six months ended June 30, 2011 a total of  $1.0 million and $27.4 million related to the merger with Valeant Pharmaceutical International, respectively and $15.3 million and $18.8 million related to the acquisition of Pharma Swiss SA on March 10, 2011, respectively.

(e) Alliance product assets & pp&e step-up represents the step up to fair market value from Legacy Valeant's original cost resulting from the merger of Legacy Valeant into Legacy Biovail. The impact of the amortization of this step-up is included in cost of alliance and royalty & SG&A. For the three and six months ended June 30, 2011 the total impact is $0.3 million and $19.3 million, respectively.

(f) Total stock-based compensation for the three and six months ended June 30, 2011 was $ 25.6 million and $55.5 million, of which $16.1 million and $39.4 million reflect the amortization of the fair value step-up increment resulting from the merger, respectively.

(g) Restructuring, integration and acquisition-related costs for the three and six months ended June 30, 2011 represent costs related to the merger of Legacy Valeant and Legacy Biovail. These include $13.0 million and $17.1 million related to facility related costs, $5.3 million and $10.2 million related to contract cancellation fees, consulting, legal and other, $4.4 million and $9.3 million related to employee severance costs, $0.3 million and $3.6 million related to increases in deferred stock unit values related to directors retired as a result of the merger between Legacy Valeant and Legacy Biovail, $1.9 million and $3.4 million related to acquisition costs, $3.3 million and $3.3 million related to manufacturing integration, and $1.3 million and $1.6 million related to wind down costs, respectively.

Valeant Pharmaceuticals International, Inc.

Table 3

Statement of Revenue - by Segment

For the Three and Six Months Ended June 30, 2011 and 2010

(In thousands)

Three Months Ended

June 30,

Revenue (a)(b)

2011

GAAP

2010

GAAP

%

Change

(c)

2011

currency

impact

2011

excluding

currency

impact

non-GAAP

%

Change

(c)

 U.S. Neurology & Other

$                         234,503

$ 159,074

47%

$          -

$          234,503

47%

 U.S. Dermatology

109,854

41,418

165%

(203)

109,651

165%

 Total U.S.

344,357

200,492

72%

(203)

344,154

72%

Canada/Australia

83,999

28,884

191%

(7,099)

76,900

166%

Specialty Pharmaceuticals

428,356

229,376

87%

(7,302)

421,054

84%

Branded Generics - Europe

116,300

9,395

1138%

(19,173)

102,016

986%

Branded Generics - Latin America

64,731

-

NM

(2,598)

59,383

NM

Branded Generics

181,031

9,395

NM

(21,771)

161,399

NM

Total revenue

$                         609,387

$ 238,771

155%

$ (26,934)

$          582,453

144%

Six Months Ended

June 30,

Revenue (a)(b)

2011

2010

%

Change

(c)

2011

currency

impact

2011

excluding

currency

impact

%

Change

(c)

 U.S. Neurology & Other

$                         444,102

$ 307,378

44%

$          -

$          444,102

44%

 U.S. Dermatology

262,560

80,392

227%

(218)

262,342

226%

 Total U.S.

706,662

387,770

82%

(218)

706,444

82%

Canada/Australia

154,244

53,396

189%

(11,593)

142,651

167%

Specialty Pharmaceuticals

860,906

441,166

95%

(11,811)

849,095

92%

Branded generics - Europe

192,393

17,240

1016%

(14,358)

178,035

933%

Branded generics - Latin America

121,114

-

NM

(8,608)

112,506

NM

Branded Generics

313,507

17,240

NM

(22,966)

290,541

NM

Total revenue

$                      1,174,413

$ 458,406

156%

$ (34,777)

$       1,139,636

149%

(a) Note: Currency effect for constant currency sales is determined by comparing 2011 reported amounts adjusted to exclude currency impact, calculated using 2010 monthly average exchange rates, to the actual 2010 reported amounts. Constant currency sales is not a GAAP-defined measure of revenue growth. Constant currency sales as defined and presented by us may not be comparable to similar measures reported by other companies.

(b) See footnote (b) to Table 2.

(c) The % change reflects revenue for the combined company for the three and six months ended June 30, 2011 as compared to Legacy Biovail alone for the three and six months ended June 30, 2010.

Valeant Pharmaceuticals International, Inc.

Table 4

Reconciliation of GAAP Statement of Cost of Goods Sold to Non-GAAP Statement Cost of Goods Sold - by Segment

For the Three and Six Months Ended June 30, 2011

(In thousands)

Three Months Ended

Six Months Ended

Cost of goods sold (a)

June 30,

June 30,

2011

as reported

GAAP

%

of

product

sales

2011

fair value

step-up

adjustment to

inventory and

amortization

(b)

2011

excluding fair

value step-up

adjustment to

inventory and

amortization

non-GAAP

%

of

product

sales

2011

as reported

GAAP

% of

product

sales

2011

fair value

step-up

adjustment to

inventory and

amortization

(b)

2011

excluding fair

value step-up

adjustment to

inventory and

amortization

non-GAAP

%

of

product

sales

U.S. Neurology & Other

$       35,391

19%

$                1,918

$             33,473

18%

$       81,775

21%

$              13,320

$             68,455

17%

U.S. Dermatology

12,291

15%

-

12,291

15%

46,994

27%

7,696

39,298

22%

Canada/Australia

23,694

29%

699

22,995

28%

44,927

30%

3,466

41,461

27%

Branded Generics - Europe

72,218

64%

15,275

56,943

50%

112,222

60%

20,579

91,643

49%

Branded Generics - Latin America

26,018

40%

287

25,731

40%

52,546

43%

4,981

47,565

39%

Corporate

300

-

300

735

-

735

$     169,912

32%

$              18,179

$           151,733

29%

$     339,199

33%

$              50,042

$           289,157

28%

 (a) See footnote (b) to Table 2.  

 (b) For the three and six months ended June 30, 2011 U.S. Neurology and Other and U.S. Dermatology include $0 and $9.4 million and $0 and $7.7 million of fair value step-up adjustment to inventory, respectively and in the three and six months ended June 30, 2011 U.S. Neurology and Other includes $2.0 million and $3.9 million of amortization, respectively.  

Valeant Pharmaceuticals International, Inc.

Table 5

Consolidated  Balance Sheet and Other Data

(In thousands)

As of

As of

June 30,

December 31,

5.1

Cash

2011

2010

Cash and cash equivalents

$            238,945

$           394,269

Marketable securities

2,954

6,083

Total cash and marketable securities

$            241,899

$           400,352

Debt

Convertible notes

$            102,617

$           417,555

Senior notes

4,326,672

2,185,822

Term loan A facility

-

975,000

Revolving credit facility

100,000

-

Other

17,500

16,900

4,546,789

3,595,277

Less: Current portion

(17,500)

(116,900)

$         4,529,289

$        3,478,377

5.2

Summary of Cash Flow Statement

Three Months Ended

June 30,

2011

2010

Cash flow provided by (used in):

Net cash provided by (used in) operating activities (GAAP)

$            226,656

$           108,913

Restructuring and acquisition-related costs

29,495

10,458

Payment of legal settlements

2,000

-

Effect of ASC 470-20 (FSP APB 14-1)

2,712

-

Working capital change related to Zovirax transaction (a)

(28,671)

-

Working capital change related to Elidel

8,471

-

Tax benefits from stock options exercised (b)

7,566

-

Non-Cash adjustments to Income Taxes Payable

13,730

-

Changes in working capital related to restructuring and

  acquisition-related costs

(2,419)

-

Adjusted cash flow from operations (Non-GAAP) (c)

$            259,540

$           119,371

 (a) Includes reversal of one time impact to accounts receivable, inventory and accounts payable associated with Zovirax transaction and launch of 30g ointment recorded in Q1.  

 (b) Includes stock option tax benefit which will reduce taxes in future periods.  

 (c) See footnote (b) to Table 2.  

Valeant Pharmaceuticals International

Table 6

Pro Forma Organic Growth - by Segment

For the Three and Six Months Ended June 30, 2011

(In thousands)

Three Months Ended

June 30,

(b)
June QTD
2011

(b) (c)

June QTD
2010

%   Change

(a) June QTD 2011 currency impact

June QTD excluding currency impact

%   Change

(d) (e)

June QTD acquisition impact at 2010 rates

June QTD excluding currency & acquisition impact

June QTD
growth at constant currency, net of acquisitions

U.S. Dermatology

$            79,596

$          77,015

3%

$             (11)

$             79,585

3%

$           (1,069)

$           78,516

2%

U.S. Neurology & Other (f)

190,360

203,296

-6%

-

190,360

-6%

-

190,360

-6%

 Total U.S.

269,956

280,311

-4%

(11)

269,945

-4%

(1,069)

268,876

-4%

Canada/Australia

82,507

65,562

26%

(7,266)

75,241

15%

(1,191)

74,050

13%

Specialty pharmaceuticals

352,463

345,873

2%

(7,277)

345,186

0%

(2,260)

342,926

-1%

Branded generics - Latin America

64,732

51,771

25%

(5,348)

59,384

15%

-

59,384

15%

Branded generics - Europe

112,840

50,179

125%

(13,977)

98,863

97%

(40,507)

58,356

16%

Branded Generics

177,572

101,950

74%

(19,325)

158,247

55%

(40,507)

117,740

15%

Total product sales

530,035

447,823

18%

(26,602)

503,433

12%

(42,767)

460,666

3%

Total Royalty, Alliance & Service Revenue

79,352

43,642

82%

-

79,352

82%

18,318

97,670

124%

Total Revenue (h)

609,387

491,465

(26,602)

582,785

(24,449)

558,336

14%

Less Milestones

(46,500)

-

-

(46,500)

-

(46,500)

Total Adjusted Revenue

$          562,887

$        491,465

15%

$      (26,602)

$           536,285

9%

$         (24,449)

$         511,836

4%

Add: JV Revenue (g)

$                 641

$                 32

$                -

$                  641

$                  -

$                641

Total

$          563,528

$        491,497

15%

$      (26,602)

$           536,926

9%

$         (24,449)

$         512,477

4%

Organic Growth - Excluding Diastat & Efudex

Diastat Adjustment

$              3,085

$          13,822

-78%

$                -

$               3,085

-78%

$                  -

$             3,085

-78%

 U.S. Neurology & Other

187,275

189,474

-1%

-

187,275

-1%

-

187,275

-1%

Efudex Adjustment

3,275

4,338

-25%

-

3,275

-25%

-

3,275

-25%

 U.S. Dermatology

76,321

72,677

5%

(11)

76,310

5%

(1,069)

75,241

4%

Total product sales

523,675

429,663

22%

(26,602)

497,073

16%

(42,767)

454,306

6%

Total Organic Revenue

$          556,527

$        473,305

18%

$      (26,602)

$           529,925

12%

$         (24,449)

$         505,476

7%

Six Months Ended

June 30,

(b)
June YTD
2011

(b) (c)

June YTD
2010

%   Change

(a) June YTD 2011 currency impact

June YTD excluding currency impact

%   Change

(d) (e)

June YTD acquisition impact at 2010 rates

June YTD excluding currency & acquisition impact

June YTD
growth at constant currency, net of acquisitions

U.S. Dermatology

$          175,400

$        150,514

17%

$             (36)

$           175,364

17%

$           (7,600)

$         167,764

11%

U.S. Neurology & Other (f)

394,416

393,009

0%

-

394,416

0%

(20,625)

373,791

-5%

 Total U.S.

569,816

543,523

5%

(36)

569,780

5%

(28,225)

541,555

0%

Canada/Australia

151,103

124,340

22%

(11,708)

139,395

12%

(5,034)

134,361

8%

Specialty pharmaceuticals

720,919

667,863

8%

(11,744)

709,175

6%

(33,259)

675,916

1%

Branded generics - Latin America

121,115

93,829

29%

(8,608)

112,507

20%

(6,471)

106,036

13%

Branded generics - Europe

188,422

99,730

89%

(14,119)

174,303

75%

(55,429)

118,874

19%

Branded Generics

309,537

193,559

60%

(22,727)

286,810

48%

(61,900)

224,910

16%

Total product sales

1,030,456

861,422

20%

(34,471)

995,985

16%

(95,159)

900,826

5%

Total Royalty, Alliance & Service Revenue

143,957

78,728

83%

-

143,957

83%

30,481

174,438

122%

Total Revenue (h)

1,174,413

940,150

(34,471)

1,139,942

(64,678)

1,075,264

Less Milestones

(83,000)

-

-

(83,000)

-

(83,000)

Total Adjusted Revenue

$       1,091,413

$        940,150

16%

$      (34,471)

$        1,056,942

12%

$         (64,678)

$         992,264

6%

Add: JV Revenue (g)

$                 871

$                 64

$                -

$                  871

$                  -

$                871

Total

$       1,092,284

$        940,214

16%

$      (34,471)

$        1,057,813

13%

$         (64,678)

$         993,135

6%

Organic Growth - Excluding Diastat & Efudex

Diastat Adjustment

$            10,999

$          29,686

-63%

$                -

$             10,999

-63%

$                  -

$           10,999

-63%

 U.S. Neurology & Other

383,417

363,323

6%

-

383,417

6%