Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) announces third quarter financial results for 2010. The merger of Biovail Corporation (Legacy Biovail) and Valeant Pharmaceuticals International (Legacy Valeant) was completed on September 28, 2010. Accordingly, as required under generally accepted accounting principles, the reported third quarter results reflect the full third quarter financial results of Legacy Biovail and only 3 days’ results for Legacy Valeant. The reported revenue included no contribution from Legacy Valeant; as an administrative accommodation, shipping for Legacy Valeant was cut-off in advance of the merger date. These financial statements also reflect the recognition of the assets and liabilities of Legacy Valeant acquired under the merger at their fair values.
“The Legacy Biovail financial results for the quarter, from my perspective, were disappointing,” said J. Michael Pearson, chief executive officer. “The Legacy Valeant business continues to perform well. With one month behind us as a new company, I am pleased with the combined operating performance of our new company and the many new commercial initiatives underway. In the fourth quarter, we expect to generate approximately $500 million in revenue and $200 million in adjusted non-GAAP cash flows from operations, despite the anticipated loss of over $20 million of 4th quarter revenues from the impact of the entry of an authorized generic of Diastat, reduced ribavirin royalties and the elimination of both the Biovail R&D revenues and the GSK alliance payment. More important, with the merger now complete, we have already made the hard decisions about products, people, facilities and development programs, and have begun to put the combined company on a path to sustainable growth and strong cash flow generation.”
Revenue for Legacy Biovail
Total reported revenue was $208.3 million in the third quarter of 2010 as compared to $212.5 million in the third quarter of 2009, a decrease of 2%.
Product sales were $201.4 million in the third quarter of 2010, as compared to $204.3 million in the third quarter of 2009, a decrease of 1%. This decline was primarily due to decreased product sales for Wellbutrin XL®, Ultram® ER, Cardizem® LA and Generics, partially offset by increases in Xenazine®, Biovail Pharmaceuticals Canada and the Legacy portfolio.
Research and development (R&D) revenue was $0.5 million in the third quarter of 2010 as compared to $3.4 million in the third quarter of 2009. This decrease is attributable to the divestiture of Biovail’s contract research division (CRD) to Lambda Therapeutic Research Inc. in July 2010.
Operating Expenses for Legacy Biovail
The Company’s cost of goods sold increased 23% to $62.1 million in the third quarter of 2010 as compared to $50.7 million in the third quarter of 2009, primarily reflecting the increased supply price in effect for Zovirax® and increased sales of lower-margin Xenazine®.
Selling, General and Administrative expenses increased 34% in the third quarter of 2010 to $60.2 million as compared to $44.8 million in the third quarter of 2009, primarily due to the inclusion of a non-cash $20.1 million charge, reflecting the valuation of replacement share-based awards arising from the merger transaction.
Research and development expenses in the quarter of $14.3 million reflect a decrease of 38% or $8.9 million as compared to the third quarter of 2009. Included in the third quarter of 2009 was an IPR&D charge of $8.1 million related to the fipamezole acquisition.
Merger Related Costs & Expenses
The Company recorded $28.0 million of merger-related transaction costs in the third quarter.
Restructuring charges of $95.9 million were recorded in the quarter, virtually all of which arise from the merger and are primarily employee termination costs. The Company estimates it will incur costs of between $135 million and $180 million (of which the non-cash component, including share-based compensation, is expected to be approximately $55 million) in connection with the integration and cost-rationalization activities associated with the merger.
The tax provision in the quarter ended September 30, 2010 of $60 million was impacted by a number of merger-related items and by the provision for legal settlements in jurisdictions with lower tax rates or where a full valuation allowance exists against available tax loss carryfowards.
Net Loss and Cash Flow from Operating Activities
The Company reported a net loss of $207.9 million for the third quarter of 2010, or a loss of $1.27 per diluted share, as compared to net income of $40.4 million, or $0.25 per diluted share, for the third quarter of 2009.
Cash flow from operating activities was $110.9 million in the quarter, as compared to $89.2 million for the third quarter of 2009.
The Company has determined that the provision of a Cash EPS number in the third quarter is not useful given the significant impact of the merger on both earnings and the fully-diluted share computation.
Legacy Valeant Revenues
Legacy Valeant revenues were $259.2 million for the partial third quarter of 2010 as compared to $220.3 million in the full third quarter of 2009, an increase of 18%. The partial third quarter of 2010 reflected a significant decrease from Diastat due to the impact of an authorized generic entering the market on September 1, 2010. Excluding Diastat, product sales increased 26%. It is also important to note that product sales only reflected a partial quarter given the decision to stop shipment of all products three to thirteen days prior to the quarter end.
Significant progress has been made on the integration of Legacy Biovail and Legacy Valeant. Following a disciplined review of the Company’s pipeline assets, which focused on strategic and financial hurdles, the decision was made to terminate a number of these projects. The affected counterparties have all been notified. The estimated costs to terminate these arrangements (approximately $15 - $20 million in total) are included in our estimated restructuring costs. As these decisions were reached after the quarter end, none of the termination costs are reflected in the current quarter. We expect spending on all these terminated projects to be completed by the end of the first quarter of 2011.
As committed, by October 15, 2010 all our employees had been notified as to their status with the ongoing Company. Approximately 500 jobs were eliminated and the majority of those terminated will be leaving by December 31, 2010. We are in the process of vacating several facilities, including Aliso Viejo, CA, Bridgewater, NJ, Carolina, PR, Chantilly, VA, Fort Worth, TX, Lawrenceville, NJ, and Redwood City, CA.
Due to the recently completed merger, the Company will not be issuing full year guidance for 2010. For the fourth quarter of 2010, the Company is expecting approximately $500 million in total revenue and approximately $200 million in adjusted non-GAAP cash flows from operations. The Company expects to be in a position to provide financial guidance for 2011 in January of 2011.
Valeant Pharmaceuticals International, Inc.