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VRX > SEC Filings for VRX > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for VALEANT PHARMACEUTICALS INTERNATIONAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for VALEANT PHARMACEUTICALS INTERNATIONAL, INC.


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for the interim period ended March 31, 2013 (the "unaudited consolidated financial statements"). This MD&A should also be read in conjunction with the annual MD&A and the audited consolidated financial statements and notes thereto prepared in accordance with U.S. GAAP that are contained in our Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K"). Additional information relating to the Company, including the 2012 Form 10-K, is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission (the "SEC") website at www.sec.gov.
Unless otherwise indicated herein, the discussion and analysis contained in this MD&A is as of May 3, 2013.
All dollar amounts are expressed in U.S. dollars, unless otherwise noted.
COMPANY PROFILE
We are a multinational, specialty pharmaceutical company that develops, manufactures and markets a broad range of pharmaceutical products, as well as medical devices. Our specialty pharmaceutical and over-the-counter ("OTC") products are marketed under brand names and are sold in the U.S., Canada, Australia and New Zealand, where we focus most of our efforts on products in the dermatology and neurology therapeutic classes. We also have branded generic, branded and OTC operations in Central and Eastern Europe, Latin America, Southeast Asia and South Africa.
Our strategy is to focus our business on core geographies and therapeutic classes, manage pipeline assets either internally or through strategic partnerships with other pharmaceutical companies and deploy cash with an appropriate mix of selective acquisitions, debt repayments and repurchases, and share buybacks. We believe this strategy will allow us to improve both our growth rate and profitability and to enhance shareholder value.
BUSINESS DEVELOPMENT
We continue to focus the business on core geographies and therapeutic classes
through selective acquisitions, dispositions and strategic partnerships with
other pharmaceutical companies. We have completed several transactions to expand
our product portfolio, including, among others, the following acquisitions in
2013:
                                                        Acquisition
Acquisitions of businesses and product rights               Date
Obagi Medical Products, Inc. ("Obagi")               April 25, 2013
Certain assets of Eisai Inc. ("Eisai")               February 20, 2013
Natur Produkt International, JSC ("Natur Produkt")   February 1, 2013

For more information regarding our acquisitions, see note 3 and note 19 to the unaudited consolidated financial statements.
RESTRUCTURING AND INTEGRATION
Medicis Acquisition-Related Cost-Rationalization and Integration Initiatives The complementary nature of the Company and Medicis Pharmaceutical Corporation ("Medicis") businesses has provided an opportunity to capture significant operating synergies from reductions in sales and marketing, general and administrative expenses, and research and development. In total, we have identified approximately $300 million of cost synergies on an annual run rate basis that we expect to achieve by the end of 2013. This amount does not include potential revenue synergies or the potential benefits of expanding the Company's corporate structure to Medicis' operations.
We estimate that we will incur total costs significantly less than the estimated annual synergies of $300 million in connection with these cost-rationalization and integration initiatives, which are expected to be substantially completed by the end of 2013. Since the acquisition date, total costs of $143.3 million (including (i) $101.4 million of restructuring expenses, (ii) $32.2 million of acquisition-related costs, which excludes $24.2 million of acquisition-related costs recognized in the fourth quarter of 2012


related to royalties to be paid to Galderma S.A. on sales of Sculptra®, and
(iii) $9.7 million of integration expenses) have been incurred through March 31, 2013. These costs primarily include: employee termination costs payable to approximately 750 employees of the Company and Medicis who have been or will be terminated as a result of the Medicis acquisition; in-process research and development ("IPR&D") termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. These estimates do not include a charge of $77.3 million recognized and paid in the fourth quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, and share appreciation rights for Medicis employees that was triggered by the change in control. See note 5 to the unaudited consolidated financial statements for detailed information summarizing the major components of costs incurred in connection with our Medicis acquisition-related initiatives through March 31, 2013.

SELECTED FINANCIAL INFORMATION
The following table provides selected financial information for the periods
indicated:
                                         Three Months Ended March 31,
                                      2013         2012          Change
($ in 000s, except per share data)      $            $           $        %
Revenues                           1,068,355     856,103     212,252     25
Operating expenses                   951,349     794,607     156,742     20
Net loss                             (27,530 )   (12,921 )   (14,609 )   113
Basic and diluted loss per share       (0.09 )     (0.04 )     (0.05 )   125


                                             As of          As of
                                           March 31,    December 31,
                                             2013           2012             Change
($ in 000s)                                    $              $             $         %

Total assets 17,486,467 17,950,379 (463,912 ) (3) Long-term debt, including current portion 10,617,120 11,015,625 (398,505 ) (4)

Financial Performance
Changes in Revenues
Total revenues increased $212.3 million, or 25%, to $1,068.4 million in the first quarter of 2013, compared with $856.1 million in the first quarter of 2012, primarily due to:
• incremental product sales revenue of $269.3 million, in the aggregate, from all 2012 acquisitions in the first quarter of 2013, primarily from the Medicis, OraPharma Topco Holdings, Inc. ("OraPharma"), Gerot Lannach, Johnson & Johnson Consumer Companies, Inc ("J&J North America"), University Medical Pharmaceuticals Corp. ("University Medical") and Atlantis Pharma ("Atlantis") acquisitions. We also recognized incremental product sales revenue of $35.2 million, in the aggregate, from all 2013 acquisitions in the first quarter of 2013, primarily from the Eisai and Natur Produkt acquisitions; and

• incremental product sales revenue of $38.5 million in the first quarter of 2013, related to growth from the existing business primarily from the impact of pricing actions, excluding the decline in Developed Markets described below.

Those factors were partially offset by:
• alliance revenue of $66.3 million on the sale of 1% clindamycin and 5% benzoyl peroxide gel ("IDP-111") and 5% fluorouracil cream ("5-FU") products in the first quarter of 2012 that did not similarly occur in the first quarter of 2013;

• decrease in product sales in the Developed Markets segment of $29.4 million, in the aggregate, due to (i) generic competition, primarily related to a continuing decline in sales of Cesamet® and BenzaClin®, and
(ii) a decline in product sales of certain suncare and skincare brands sold primarily in Australia and Canada that are classified as assets held for sale;

• a negative impact from divestitures, discontinuations and supply interruptions of $24.9 million in the first quarter of 2013, including a decrease of $4.4 million related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012; and


• a negative foreign currency exchange impact on the existing business of $5.2 million in the first quarter of 2013.

Changes in Earnings
Net loss increased $14.6 million, or 113%, to $27.5 million (basic and diluted loss per share of $0.09) in the first quarter of 2013, compared with $12.9 million (basic and diluted loss per share of $0.04) in the first quarter of 2012, reflecting the following factors:
• an increase of $125.5 million in amortization expense, as described below under "Results of Operations - Operating Expenses - Amortization of Intangible Assets";

• an increase of $64.6 million in selling, general and administrative expense, as described below under "Results of Operations - Operating Expenses - Selling, General and Administrative Expenses";

• an increase of $53.3 million in interest expense, as described below under "Results of Operations - Non-Operating Income (Expense) - Interest Expense";

• a decrease of $22.9 million in foreign exchange and other, as described below under "Results of Operations - Non-Operating Income (Expense) - Foreign Exchange and Other"; and

• an increase of $21.2 million in loss on extinguishment of debt, as described below under "Results of Operations - Non-Operating Income (Expense) - Loss on Extinguishment of Debt".

Those factors were partially offset by:
• an increase in contribution (product sales revenue less cost of goods sold, exclusive of amortization of intangible assets) of $227.3 million, mainly related to the incremental contribution of Medicis, OraPharma, Eisai, Natur Produkt and Gerot Lannach;

• an increase of $27.0 million in recovery of income taxes, as described below under "Results of Operations - Income Taxes"; and

• a decrease of $13.4 million in restructuring, integration and other costs, as described below under "Results of Operations - Operating Expenses - Restructuring, Integration and Other Costs".

Cash Dividends
No dividends were declared or paid in the first quarters of 2013 and 2012. While our board of directors will review our dividend policy from time to time, we currently do not intend to pay dividends in the foreseeable future. In addition, the covenants contained in the Third Amended and Restated Credit and Guaranty Agreement (the "Credit Agreement") include restrictions on the payment of dividends.
RESULTS OF OPERATIONS
Reportable Segments
As a result of our acquisition strategy and continued growth, impacted most recently by the December 2012 Medicis acquisition, our Chief Executive Officer ("CEO"), who is our Chief Operating Decision Maker ("CODM"), began to manage the business differently in 2013, which necessitated a realignment of the segment structure. Pursuant to this change, which was effective in the first quarter of 2013, we now have two reportable segments: (i) Developed Markets, and
(ii) Emerging Markets. Accordingly, we have restated prior period segment information to conform to the current period presentation. The following is a brief description of our segments:
• Developed Markets consists of (i) sales in the U.S. of pharmaceutical and OTC products, and alliance and contract service revenues, in the areas of dermatology and topical medication, aesthetics (including medical devices), dentistry, ophthalmology and podiatry, (ii) sales in the U.S. of pharmaceutical products indicated for the treatment of neurological and other diseases, as well as alliance revenue from the licensing of various products we developed or acquired and (iii) pharmaceutical and OTC products sold in Canada, Australia and New Zealand.

• Emerging Markets consists of branded generic pharmaceutical products, as well as OTC products and agency/in-licensing arrangements with other research-based pharmaceutical companies (where the Company distributes and markets branded, patented products under long-term, renewable contracts). Products are sold primarily in Central and Eastern Europe (primarily Poland, Serbia, and Russia), Latin America (Mexico, Brazil and exports out of Mexico to other Latin American markets), Southeast Asia and South Africa.


Revenues By Segment
The following table displays revenues by segment for the first quarters of 2013
and 2012, the percentage of each segment's revenues compared with total revenues
in the respective period, and the dollar and percentage change in the dollar
amount of each segment's revenues. Percentages may not sum due to rounding.
                            Three Months Ended March 31,
                        2013              2012           Change
($ in 000s)           $         %       $        %       $       %
Developed Markets   771,144    72    618,888    72    152,256    25
Emerging Markets    297,211    28    237,215    28     59,996    25
Total revenues    1,068,355    100   856,103    100   212,252    25

Total revenues increased $212.3 million, or 25%, to $1,068.4 million in the first quarter of 2013, compared with $856.1 million in the first quarter of 2012, mainly attributable to the effect of the following factors:
• in the Developed Markets segment:

• the incremental product sales revenue of $256.5 million, in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from (i) the 2012 acquisitions of Medicis (mainly driven by Solodyn®, Restylane®, Dysport®, Ziana®, Vanos® and Perlane® product sales), OraPharma (mainly driven by Arestin® product sales), certain assets of J&J North America (mainly driven by Ambi®, Shower to Shower® and Caladryl® product sales) and certain assets of University Medical (mainly driven by AcneFree™ product line sales); and (ii) the 2013 acquisition of certain assets of Eisai (Targretin® product sales); and

• an increase in product sales from the existing business (excluding the decline described below) of $13.7 million, or 3%, driven by growth of the core dermatology brands, including Retin-A Micro®, Acanya®, CeraVe® and Zovirax®. As a result of the approval of a generic Zovirax® ointment in April 2013, we will likely experience declining Zovirax® ointment revenues in the future, and such declines could be material. Refer to note 19 of notes to unaudited consolidated financial statements for details regarding Zovirax® agreements entered into in April 2013 with Actavis.

Those factors were partially offset by:
• alliance revenue of $66.3 million on the sale of the IDP-111 and 5-FU products in the first quarter of 2012 that did not similarly occur in the first quarter of 2013;

• decrease in product sales of $29.4 million, in the aggregate, due to (i) generic competition, primarily related to a continuing decline in sales of Cesamet® and BenzaClin®, and (ii) a decline in product sales of certain suncare and skincare brands sold primarily in Australia and Canada that are classified as assets held for sale. We anticipate a continuing decline in sales of Cesamet® and BenzaClin® due to continued generic erosion, however the rate of decline is expected to decrease in the future, and these brands are expected to represent a declining percentage of total revenues primarily due to anticipated growth in other parts of our business and recent acquisitions;

• a negative impact from divestitures, discontinuations and supply interruptions of $15.7 million in the first quarter of 2013, including a decrease of $4.4 million related to IDP-111 royalty revenue as a result of the sale of IDP-111 in February 2012; and

• a negative foreign currency exchange impact on the existing business of $1.1 million in the first quarter of 2013.

• in the Emerging Markets segment:

• the incremental product sales revenue of $48.0 million, in the aggregate, from all 2012 acquisitions and all 2013 acquisitions, primarily from (i) the 2012 acquisitions of certain assets of Gerot Lannach and Atlantis and
(ii) the 2013 acquisition of Natur Produkt; and

• an increase in product sales from the existing business of $25.0 million, or 11%, in the first quarter of 2013.

Those factors were partially offset by:
• a negative impact from divestitures, discontinuations and supply interruptions of $9.2 million in the first quarter of 2013; and

• a negative foreign currency exchange impact on the existing business of $4.1 million in the first quarter of 2013.


Segment Profit
Segment profit is based on operating income after the elimination of intercompany transactions. Certain costs, such as restructuring and acquisition-related costs, legal settlements and related fees and in-process research and development impairments and other charges, are not included in the measure of segment profit, as management excludes these items in assessing segment financial performance. In addition, share-based compensation is not allocated to segments, since the amount of such expense depends on company-wide performance rather than the operating performance of any single segment. The following table displays profit by segment for the first quarters of 2013 and 2012, the percentage of each segment's profit compared with corresponding segment revenues in the respective period, and the dollar and percentage change in the dollar amount of each segment's profit. Percentages may not add due to rounding.

                               Three Months Ended March 31,
                          2013              2012            Change
($ in 000s)             $       %(1)      $       %(1)      $      %

Developed Markets 185,253 24 155,719 25 29,534 19 Emerging Markets 28,557 10 22,971 10 5,586 24 Total segment profit 213,810 20 178,690 21 35,120 20



(1) - Represents profit as a percentage of the corresponding revenues. Total segment profit increased $35.1 million, or 20%, to $213.8 million in the first quarter of 2013, compared with $178.7 million in the first quarter of 2012, mainly attributable to the effect of the following factors:
• in the Developed Markets segment:

•        an increase in contribution of $181.8 million, in the aggregate, from
         all 2012 acquisitions and all 2013 acquisitions, primarily from the
         product sales of Medicis, OraPharma and Eisai, including expenses for
         acquisition accounting adjustments related to inventory of
         $41.1 million, in the aggregate;


•        an increase in contribution from product sales from the existing
         business (excluding the favorable impact related to the acquisition
         accounting adjustments related to inventory in the first quarter of 2012
         that did not similarly occur in the first quarter of 2013 and the
         declines described below) of $14.8 million, driven by growth of the core
         dermatology brands, including Retin-A Micro®, Acanya®, CeraVe® and
         Zovirax®; and


•        a favorable impact of $32.9 million related to the existing business
         acquisition accounting adjustments related to inventory in the first
         quarter of 2012 that did not similarly occur in the first quarter of
         2013.

Those factors were partially offset by:

•        an increase in operating expenses (including amortization expense) of
         $156.5 million in the first quarter of 2013, primarily associated with
         the acquisitions of new businesses within the segment;


•        a decrease in contribution of $26.8 million in the first quarter of
         2013, primarily related to the lower sales of Cesamet® and BenzaClin® as
         a result of generic competition; and


•        a decrease in contribution of $14.4 million in the first quarter of
         2013, primarily related to divestitures, discontinuations and supply
         interruptions. The largest contributor to the decrease was a reduction
         in IDP-111 royalty revenue of $4.4 million as a result of the sale of
         IDP-111 in February 2012.

• in the Emerging Markets segment:

•        an increase in contribution of $30.8 million, in the aggregate, from all
         2012 acquisitions and all 2013 acquisitions, in the first quarter of
         2013, primarily from the sale of Natur Produkt and Gerot Lannach
         products, including expenses for acquisition accounting adjustments
         related to inventory of $2.2 million, in the aggregate, in the first
         quarter of 2013;


•        an increase in contribution from product sales from the existing
         business of $12.9 million in the first quarter of 2013; and


•        an increase in alliance contribution of $2.5 million in the first
         quarter of 2013.


Those factors were partially offset by:

•        an increase in operating expenses (including amortization expense) of
         $32.0 million in the first quarter of 2013, primarily associated with
         the acquisitions of new businesses within the segment;


•        a decrease in contribution of $4.9 million in the first quarter of 2013
         related to divestitures, discontinuations and supply interruptions; and


•        a negative foreign currency exchange impact on the existing business
         contribution of $3.8 million in the first quarter of 2013.

Operating Expenses
The following table displays the dollar amount of each operating expense
category for the first quarters of 2013 and 2012, the percentage of each
category compared with total revenues in the respective year, and the dollar and
percentage changes in the dollar amount of each category. Percentages may not
sum due to rounding.
                                                             Three Months Ended March 31,
                                                    2013                 2012                Change
($ in 000s)                                      $        %(1)        $        %(1)        $         %
Cost of goods sold (exclusive of
amortization of intangible assets shown
separately below)                            284,904       27     224,196       26      60,708       27
Cost of alliance and service revenues         15,429        1      87,640       10     (72,211 )    (82 )
Selling, general and administrative          241,899       23     177,286       21      64,613       36
Research and development                      23,795        2      22,006        3       1,789        8
Amortization of intangible assets            326,175       31     200,643       23     125,532       63
Restructuring, integration and other costs    48,985        5      62,337        7     (13,352 )    (21 )
Acquisition-related costs                      7,899        1       7,505        1         394       NM
Legal settlements and related fees             4,448        -       3,155        -       1,293       41
Acquisition-related contingent consideration  (2,185 )      -       9,839        1     (12,024 )   (122 )
Total operating expenses                     951,349       90     794,607       93     156,742       20


____________________________________


(1) - Represents the percentage for each category as compared to total revenues. NM - Not meaningful Cost of Goods Sold Cost of goods sold, which excludes the amortization of intangible assets described separately below under "- Amortization of Intangible Assets" increased $60.7 million, or 27%, to $284.9 million in the first quarter of 2013, compared with $224.2 million in the first quarter of 2012. The percentage increase in cost of goods sold in the first quarter of 2013 was lower than the corresponding 38% increase in product sales in the first quarter of 2013, primarily due to:
• a favorable impact from product mix primarily related to the Medicis product portfolio; and

• the benefits realized from worldwide manufacturing rationalization initiatives.

Those factors were partially offset by:
• decreased sales of Cesamet® and BenzaClin® which have a higher gross profit margin than our overall margin; and

• the impact of higher acquisition accounting adjustments of $10.2 million, to $43.2 million in the first quarter of 2013, compared with $33.0 million in the first quarter of 2012, related to acquired inventories that were subsequently sold in the first quarter of 2013.

Cost of Alliance and Service Revenues
Cost of alliance and service revenues decreased $72.2 million, or 82%, to $15.4 million in the first quarter of 2013, compared with $87.6 million in the first quarter of 2012, primarily due to the inclusion of the carrying amounts of the IDP-111 and 5-FU intangible assets of $69.2 million, in the aggregate, which were expensed on the sale of these products in the first quarter of 2012. Selling, General and Administrative Expenses


Selling, general and administrative expenses increased $64.6 million, or 36%, to $241.9 million in the first quarter of 2013, compared with $177.3 million in the first quarter of 2012, primarily due to:
• increased expenses in our Developed Markets segment ($41.0 million) primarily driven by the acquisitions of new businesses within the segment, including the Medicis acquisition; and

• increased expenses in our Emerging Markets segment ($19.9 million), primarily driven by the acquisitions of new businesses within this segment.

As a percentage of revenue, Selling, general and administrative expenses increased to 23% in the first quarter of 2013, as compared to 21% in the first quarter of 2012, primarily related to timing of synergy realization from the Medicis acquisition.
Research and Development Expenses
Research and development expenses increased $1.8 million, or 8%, to $23.8 million in the first quarter of 2013, compared with $22.0 million in the first quarter of 2012, primarily due to spending on new programs acquired in the Medicis and OraPharma acquisitions, partially offset by lower spending on ezogabine/retigabine reflecting the U.S. launch in the second quarter of 2012. See note 3 to the unaudited consolidated financial statements for additional information relating to the Medicis and OraPharma acquisitions. Amortization of Intangible Assets
Amortization of intangible assets increased $125.5 million, or 63%, to $326.2 million in the first quarter of 2013, compared with $200.6 million in the first quarter of 2012, primarily due to (i) the amortization of the Medicis, OraPharma . . .

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