Valeant Pharmaceuticals Reports 2011 Third Quarter Financial Results

Valeant Pharmaceuticals International, Inc.

Table 1

Condensed Consolidated Statement of Income

For the Three and Nine Months Ended September 30, 2011 and 2010

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except per share data)

2011

2010

(a)

% Change

2011

2010

(a)

% Change

Product sales

$ 570,423

$  201,372

NM

$ 1,600,879

$  644,650

NM

Alliance and royalty

22,471

6,150

NM

146,873

15,146

NM

Service and other

7,690

745

NM

27,245

6,877

NM

Total revenues

600,584

208,267

NM

1,774,997

666,673

NM

Cost of goods sold (exclusive amortization of intangible assets shown separately below)

162,568

62,142

NM

501,767

184,947

NM

Cost of services

3,078

532

NM

9,683

7,211

NM

Cost of alliances

-

-

NM

30,735

-

NM

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

134,801

60,187

NM

423,964

148,794

NM

Research and development

17,476

13,766

NM

48,910

49,987

NM

Contingent consideration fair value adjustments

6,904

-

NM

9,042

-

NM

Acquired in-process research and development

-

-

NM

4,000

61,245

NM

Legal settlements

-

38,500

NM

2,400

38,500

NM

Restructuring and acquisition-related costs

25,372

123,953

NM

73,913

135,024

NM

Amortization of intangible assets

138,027

35,499

NM

365,016

102,098

NM

488,226

334,579

1,469,430

727,806

Operating income (loss)

112,358

(126,312)

305,567

(61,133)

Interest expense, net

(86,452)

(11,092)

(236,387)

(30,449)

Loss on extinguishment of debt

(10,315)

-

(33,325)

-

Gain (loss) on investments, net

(140)

(5,005)

22,787

(5,552)

Other income (expense), net including translation and exchange

(3,590)

(5,473)

64

(5,429)

Income (loss) before (recovery) provision for income taxes

11,861

(147,882)

58,706

(102,563)

(Recovery of) provision for income taxes

(29,001)

60,000

(44,998)

74,500

Net income (loss)

$   40,862

$ (207,882)

$    103,704

$ (177,063)

Earnings per share:

Basic:

Net income (loss)

$       0.13

$       (1.27)

$          0.34

$       (1.11)

Shares used in per share computation

302,702

163,295

303,285

160,082

Diluted:

Net income (loss)

$       0.13

$       (1.27)

$          0.32

$       (1.11)

Shares used in per share computation

322,783

163,295

329,010

160,082

(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 Nine Months Ended September 30, 2011 and 2010

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except per share data)

2011

2010

2011

2010

(a)

Net income (loss)

$   40,862

$ (207,882)

$ 103,704

$ (177,063)

Non-GAAP adjustments (b)(c):

Inventory step-up (d)

2,768

-

48,939

-

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

138

-

19,478

-

Stock-based compensation step-up (f)

11,149

-

50,556

-

Contingent consideration fair value adjustment

6,904

-

9,042

-

Restructuring, integration and acquisition-related costs (g)

25,372

123,953

73,913

135,024

Acquired in-process research and development (IPR&D)

-

-

4,000

61,245

Legal settlements

-

38,500

2,400

38,500

Amortization and other non-cash charges

140,500

38,147

371,897

110,225

186,831

200,600

580,225

344,994

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

12,686

15,340

19,034

23,622

Loss on extinguishment of debt

10,315

-

33,325

-

(Gain) loss on investments, net

-

5,005

(1,769)

5,552

Tax

(38,601)

59,500

(77,098)

64,500

Total adjustments

171,231

280,445

553,717

438,668

Adjusted income

$ 212,093

$    72,563

$ 657,421

$  261,605

GAAP earnings  per share - diluted

$       0.13

$       (1.27)

$       0.32

$       (1.11)

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

$       0.66

$        0.42

$       2.00

$        1.58

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

322,783

173,247

329,010

165,145

(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 nine months ended September 30, 2011 the total impact is $2.8 million and $48.9 million, respectively. For the three and nine months ended September 30, 2011 a total of  $0.4 million and $27.7 million related to the merger with Valeant Pharmaceutical International, $0.0 million and $18.8 million related to the acquisition of Pharma Swiss SA on March 10, 2011, and $2.4 million and $2.4 million related to the acquisition of Sanitas on August 19th, 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 nine months ended September 30, 2011 the total impact is $0.1 million and $19.5 million, respectively.

(f) Total stock-based compensation for the three and nine months ended September 30, 2011 was $17.1 million and $72.4 million, of which $11.1 million and $50.6 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 nine months ended September 30, 2011 represent costs related to the merger of Legacy Valeant and Legacy Biovail, the acquisition of Pharma Swiss SA, and the acquisition of Sanitas. These include $0.9 million and $18.0 million related to facility related costs, $6.7 million and $16.9 million related to contract cancellation fees, consulting, legal and other, $5.0 million and $14.3 million related to employee severance costs, $(0.7) million and $2.9 million related to (decreases)/increases in deferred stock unit values related to directors retired as a result of the merger between Legacy Valeant and Legacy Biovail, $9.5 million and $12.9 million related to acquisition costs, $1.1 million and $4.4 million related to manufacturing integration, and $2.9 million and $4.5 million related to wind down costs, respectively.

Valeant Pharmaceuticals International, Inc.

Table 2 (a)

Reconciliation of Non-GAAP Adjustments

For the Three Months Ended September 30, 2011 and 2010

Three Months Ended

September 30, 2011

Inventory step-

up

Alliance

product

assets &

pp&e step-up

Stock-based

compensation

step-up

Contingent

consideration

fair value

adjustment

Restructuring,

integration and

acquisition-

related costs

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

Tax

Product Sales

- -

- -

- -

- -

- -

268

- -

- -

- -

Cost of goods sold (exclusive amortization of intangible assets shown separately below)

2,768

138

209

- -

- -

2,205

- -

- -

- -

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

- -

- -

10,579

- -

- -

- -

- -

- -

- -

Research and development

- -

- -

361

- -

- -

- -

- -

- -

- -

Contingent consideration fair value adjustments

- -

- -

- -

6,904

- -

- -

- -

- -

- -

Restructuring and acquisition-related costs

- -

- -

- -

- -

25,372

- -

- -

- -

- -

Amortization of intangible assets

- -

- -

- -

- -

- -

138,027

- -

- -

- -

Interest expense, net

- -

- -

- -

- -

- -

- -

12,686

- -

- -

Loss on extinguishment of debt

- -

- -

- -

- -

- -

- -

- -

10,315

- -

Tax

- -

- -

- -

- -

- -

- -

- -

- -

(38,601)

Total Adjustments

$                2,768

$               138

$            11,149

$                 6,904

$             25,372

$          140,500

$           12,686

$               10,315

$     (38,601)

Three Months Ended

September 30, 2010

Restructuring,

integration and

acquisition-

related costs

Legal

settlements

Amortization

and other non-

cash charges

Amortization of

deferred

financing costs,

debt discounts

and ASC 470-20

(FSP APB 14-1)

interest

Gain (loss) on

investments,

net

Tax

Product Sales

- -

- -

268

- -

- -

- -

Cost of goods sold (exclusive amortization of intangible assets shown separately below)

- -

- -

2,118

- -

- -

- -

Legal settlements

- -

38,500

- -

- -

- -

- -

Restructuring and acquisition-related costs

123,953

- -

- -

- -

- -

- -

Amortization of intangible assets

- -

- -

35,499

- -

- -

- -

Interest expense, net

- -

- -

- -

15,340

- -

- -

Gain (loss) on investments, net

- -

- -

- -

- -

5,005

- -

Tax

- -

- -

262

- -

- -

59,500

Total Adjustments

$            123,953

$          38,500

$            38,147

$               15,340

$               5,005

$            59,500

Valeant Pharmaceuticals International, Inc.

Table 2 (b)

Reconciliation of Non-GAAP Adjustments

For the Nine Months Ended September 30, 2011 and 2010

Nine Months Ended

September 30, 2011

Inventory step-

up

Alliance

product assets

& pp&e step-up

Stock-based

compensation

step-up

Contingent

consideration

fair value

adjustment

Restructuring,

integration and

acquisition-

related costs

Acquired in-

process

research and

development

(IPR&D)

Legal

settlements

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

Tax

Product Sales

- -

- -

- -

- -

- -

- -

- -

804

- -

- -

- -

- -

Cost of goods sold (exclusive amortization of intangible assets shown separately below)

48,939

643

529

- -

- -

- -

- -

6,077

- -

- -

- -

- -

Cost of alliances

- -

18,835

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

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

- -

- -

49,401

- -

- -

- -

- -

- -

- -

- -

- -

- -

Research and development

- -

- -

626

- -

- -

- -

- -

- -

- -

- -

- -

- -

Contingent consideration fair value adjustments

- -

- -

- -

9,042

- -

- -

- -

- -

- -

- -

- -

- -

Acquired in-process research and development

- -

- -

- -

- -

- -

4,000

- -

- -

- -

- -

- -

- -

Legal settlements

- -

- -

- -

- -

- -

- -

2,400

- -

- -

- -

- -

- -

Restructuring and acquisition-related costs

- -

- -

- -

- -

73,913

- -

- -

- -

- -

- -

- -

- -

Amortization of intangible assets

- -

- -

- -

- -

- -

- -

- -

365,016

- -

- -

- -

- -

Interest expense, net

- -

- -

- -

- -

- -

- -

- -

- -

19,034

- -

- -

- -

Loss on extinguishment of debt

- -

- -

- -

- -

- -

- -

- -

- -

- -

33,325

- -

- -

Gain (loss) on investments, net

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

(1,769)

- -

Tax

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

(77,098)

Total Adjustments

$              48,939

$              19,478

$            50,556

$              9,042

$               73,913

$             4,000

$          2,400

$          371,897

$               19,034

$               33,325

$           (1,769)

$     (77,098)

Nine Months Ended

September 30, 2010

Restructuring,

integration and

acquisition-

related costs

Acquired in-

process

research and

development

(IPR&D)

Legal

settlements

Amortization

and other non-

cash charges

Amortization of

deferred

financing costs,

debt discounts

and ASC 470-20

(FSP APB 14-1)

interest

Gain (loss) on

investments, net

Tax

Product Sales

- -

- -

- -

804

- -

- -

- -

Cost of goods sold (exclusive amortization of intangible assets shown separately below)

- -

- -

- -

6,536

- -

- -

- -

Legal settlements

- -

- -

38,500

- -

- -

- -

- -

Restructuring and acquisition-related costs

135,024

- -

- -

- -

- -

- -

- -

Acquired in-process research and development

- -

61,245

Amortization of intangible assets

- -

- -

- -

102,098

- -

- -

- -

Interest expense, net

- -

- -

- -

- -

23,622

- -

- -

Gain (loss) on investments, net

- -

- -

- -

- -

- -

5,552

- -

Tax

- -

- -

- -

787

- -

- -

64,500

Total Adjustments

$            135,024

$              61,245

$            38,500

$          110,225

$               23,622

$             5,552

$        64,500

Valeant Pharmaceuticals International, Inc.

Table 3

Statement of Revenue - by Segment

For the Three and Nine Months Ended September 30, 2011 and 2010

(In thousands)

Three Months Ended

September 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

$    182,288

$ 138,035

32%

$          -

$          182,288

32%

 U.S. Dermatology

131,642

34,720

279%

(136)

131,506

279%

 Total U.S.

313,930

172,755

82%

(136)

313,794

82%

Canada/Australia

84,644

27,750

205%

(7,268)

77,376

179%

Specialty Pharmaceuticals

398,574

200,505

99%

(7,404)

391,170

95%

Branded Generics - Europe

134,055

7,762

1627%

(7,054)

127,001

1536%

Branded Generics - Latin America

67,955

-

NM

(2,706)

65,249

NM

Branded Generics

202,010

7,762

NM

(9,760)

192,250

NM

Total Revenue

$    600,584

$ 208,267

188%

$ (17,164)

$          583,420

180%

Nine Months Ended

September 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

$    626,390

$ 445,413

41%

$          -

$          626,390

41%

 U.S. Dermatology

394,202

115,112

242%

(354)

393,848

242%

 Total U.S.

1,020,592

560,525

82%

(354)

1,020,238

82%

Canada/Australia

238,888

81,146

194%

(18,861)

220,027

171%

Specialty Pharmaceuticals

1,259,480

641,671

96%

(19,215)

1,240,265

93%

Branded generics - Europe

326,448

25,002

1206%

(21,412)

305,036

1120%

Branded generics - Latin America

189,069

-

NM

(11,314)

177,755

NM

Branded Generics

515,517

25,002

NM

(32,726)

482,791

NM

Total Revenue

$ 1,774,997

$ 666,673

166%

$ (51,941)

$       1,723,056

158%

(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 nine months ended September 30, 2011 as compared to Legacy Biovail alone for the three and nine months ended September 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 Months Ended September 30, 2011

(In thousands)

Three Months Ended

Nine Months Ended

Cost of goods sold (a)           

September 30,

September 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

$       32,826

19%

$                2,205

$             30,621

17%

$     114,601

20%

$              15,525

$             99,076

17%

U.S. Dermatology

10,140

9%

-

10,140

9%

57,134

20%

7,696

49,438

17%

Canada/Australia

26,365

31%

419

25,946

31%

71,292

30%

3,885

67,407

28%