Valeant Pharmaceuticals Reports Second Quarter Financial Results

Valeant Pharmaceuticals International (NYSE:VRX) today announced second quarter financial results for 2008. Total revenue was $206.8 million in the second quarter of 2008 as compared to $220.5 million in the second quarter of 2007. The second quarter of 2008 included planned reductions of shipments to wholesaler customers in the United States, Canada and Mexico of approximately $20.0 million. North America product sales were $54.7 million in second quarter of 2008, as compared to $68.6 million in second quarter of 2007. This decrease was due to a planned reduction in shipments to wholesaler customers in the United States and Canada of approximately $17.0 million. Sales in the International region in the 2008 second quarter were $45.7 million as compared to $55.8 million in the same period last year. The second quarter of 2008 included planned wholesaler inventory reductions in Mexico of approximately $3.0 million. The second quarter of 2007 included $9.6 million in revenue from certain subsidiaries and business operations in Asia and Argentina, which were divested in the first half of 2008, compared to $2.3 million in revenue from the same operations in the second quarter of 2008. Sales in the Europe, Middle East and Africa (EMEA) region were $91.6 million in the 2008 second quarter as compared to $77.1 million in the same period last year, an increase primarily due to favorable currency fluctuations of $12.6 million. Valeant recently announced an agreement to sell a large geographic part of this region in Western and Eastern Europe, Middle East and Africa. The retained area of Central Europe, including Poland, comprised $41.1 million of the $91.6 million sales in the EMEA region. Central Europe sales increased 32% in second quarter 2008 from $31.2 million in the second quarter of 2007. Alliance revenue was $14.8 million in the 2008 second quarter as compared to $19.0 million in the same period in 2007, due to reduced ribavirin royalties. The company’s gross margin on product sales, including amortization costs, was 56% for the 2008 second quarter as compared to 64% in the second quarter of 2007. This decrease is fully due to the impact of $15 million of increased inventory obsolescence charges required by strategic changes in our commercial focus away from some products and discontinuation of others. Beginning in the second quarter of 2008, the financial presentation of gross margins has been changed to include amortization expenses. Selling expense was 31% of product sales in the second quarter of 2008 as compared to 34% in the same period a year earlier. General and administrative expenses were 22% of product sales in the 2008 second quarter, as compared to 14% in the same period in 2007. Second quarter G&A charges included a legal settlement of $9.0 million and a $3.2 million write-down of an investment in a Swiss biotech fund. Research and development costs remained flat at $22.7 million in the 2008 second quarter as compared to $22.7 million reported in the same period in 2007. This continued spending reflects the final completion of the retigabine Phase III trial and the preparation of the New Drug Application and Marketing Authorisation Application submissions for retigabine. Provision for income taxes in the 2008 second quarter was $46.9 million as compared to a benefit of $7.5 million reported in the same period in 2007. Based on a change in Valeant’s tax accounting elections for the repatriation of foreign earnings (APB 23), during the second quarter of 2008, Valeant recorded a net tax charge of $57.1 million. Net loss from continuing operations was $73.5 million for the second quarter of 2008, or a loss of $0.82 per diluted share as compared to net income from continuing operations of $21.9 million, or $0.23 per diluted share for the second quarter of 2007. Adjusted for non-GAAP items, notably income taxes, net loss from continuing operations was $5.7 million or a loss of $0.06 per diluted share in the second quarter of 2008 as compared to net income of $14.2 million, or $0.15 per diluted share in the second quarter of 2007. Net cash flow from continuing operations in the second quarter was $11.6 million. "Our financial results from this quarter, in aggregate, are poor. However, they are largely a reflection of many of the key components of the turnaround program, including planned reductions in wholesaler inventory in Canada, the U.S., and Mexico; changed commercial focus in our product portfolio; resolution of certain litigation; restructuring costs such as severance and the sales of operations in non-core countries,” said J. Michael Pearson, chairman and chief executive officer. "More importantly, we continue to make significant progress toward achieving our 6-point action plan as demonstrated by the recent agreement for the sale of part of our European operations, the retirement of $300 million in senior debt, the expansion of our share repurchase program, and headcount reduction and other cost savings initiatives begun in the quarter.” Conference Call and Webcast Information: Valeant will host a conference call today at 11:00 a.m. EDT (8:00 a.m. PDT) to discuss its 2008 second quarter results. The dial-in number to participate on this call is (877) 295-5743, confirmation code 56788630. International callers should dial (706) 679-0845, confirmation code 56788630. A replay will be available approximately two hours following the conclusion of the conference call through August 18, 2008 and can be accessed by dialing (800) 642-1687, or (706) 645-9291, confirmation code 56788630. The company will also webcast the conference call live over the Internet. The webcast may be accessed through the investor relations section of Valeant’s corporate Web site at www.valeant.com. About Valeant: Valeant Pharmaceuticals International (NYSE:VRX) is a multinational specialty pharmaceutical company that develops and markets a broad range of pharmaceutical products primarily in the areas of neurology and dermatology. More information about Valeant can be found at www.valeant.com. FORWARD-LOOKING STATEMENTS: This press release contains forward-looking statements, including, but not limited to, statements regarding the submission of applications for regulatory approval and carrying out the company’s previously announced strategic restructuring plan. These statements are based upon the current expectations and beliefs of management and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, risks and uncertainties related to the company’s ability to consummate the sale of certain of its territories in Western and Eastern Europe, Middle East and Africa and to realize the benefits of its strategic restructuring plan, and other risks and uncertainties discussed in the company’s annual report or Form 10-K for the years ended December 31, 2007 and other filings with the SEC. Valeant wishes to caution the reader that these factors are among the factors that could cause actual results to differ materially from the expectations described in the forward-looking statements. Valeant also cautions the reader that undue reliance should not be placed on any of the forward-looking statements, which speak only as of the date of this release. The company undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this release or to reflect actual outcomes. NON-GAAP INFORMATION: To supplement the consolidated financial results prepared in accordance with generally accepted accounting principles (GAAP), the company uses non-GAAP financial measures that exclude certain items, such as special charges and credits, and the tax effect of such charges. Management does not consider the excluded items part of day-to-day business or reflective of the core operational activities of the company as they result from transactions outside the ordinary course of business. 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 more 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. Financial Tables, including a reconciliation of GAAP to non-GAAP financial measures, follow. Table 1 Valeant Pharmaceuticals International Consolidated Condensed Statement of Income For the Three and Six Months Ended June 30, 2008 and 2007                   Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share data) 2008 2007 % Change 2008 2007 % Change   Product sales $ 191,958 $ 201,587 -5 % $ 373,871 $ 369,520 1 % Alliance revenue (including ribavirin royalties) (a)   14,805     18,955   -22 %   27,578     55,425   -50 % Total revenues   206,763     220,542   -6 %   401,449     424,945   -6 %   Cost of goods sold 69,479 57,614 21 % 124,369 104,515 19 % Selling expenses 59,606 67,645 -12 % 123,396 126,085 -2 % General and administrative expenses 41,482 28,743 44 % 67,588 54,858 23 % Research and development costs 22,692 22,737 0 % 52,084 43,727 19 % Restructuring, asset impairments and dispositions 17,583 6,337 NM 4,919 13,575 NM Amortization expense   18,112     18,666   -3 %   36,178     36,147   0 %   228,954     201,742   13 %   408,534     378,907   8 % Income (loss) from operations (22,191 ) 18,800 (7,085 ) 46,038   Interest expense, net (4,275 ) (6,113 ) (9,048 ) (12,554 ) Other income (expense), net including translation and exchange   (137 )   1,682     (3,389 )   2,818     Income (loss) from continuing operations before income taxes and minority interest (26,603 ) 14,369 (19,522 ) 36,302   Provision (benefit) for income taxes 46,850 (7,511 ) 54,501 899 Minority interest   2     -     4     -   Income (loss) from continuing operations (73,455 ) 21,880 (74,027 ) 35,403   Income (loss) from discontinued operations, net   (1,149 )   (4,966 )   8,873     (9,166 )     Net income (loss) $ (74,604 ) $ 16,914   $ (65,154 ) $ 26,237       Basic earnings (loss) per common share Income (loss) from continuing operations $ (0.82 ) $ 0.23 $ (0.83 ) $ 0.37 Discontinued operations, net   (0.01 )   (0.05 )   0.10     (0.09 ) Net income (loss) $ (0.83 ) $ 0.18   $ (0.73 ) $ 0.28   Shares used in per share computation   89,802     95,049     89,696     94,911     Diluted earnings (loss) per common share Income (loss) from continuing operations $ (0.82 ) $ 0.23 $ (0.83 ) $ 0.37 Discontinued operations, net   (0.01 )   (0.05 )   0.10     (0.10 ) Net income (loss) $ (0.83 ) $ 0.18   $ (0.73 ) $ 0.27   Shares used in per share computation   89,802     96,154     89,696     96,090     (a) Alliance revenue for the three and six months ended June 30, 2008 relates to ribavirin royalty of $14.8 million and $27.5 million respectively. Alliance revenue for the six months ended June 30, 2008 also includes a $0.1 million payment from an unrelated third party for a license to certain intellectual property assets. Alliance revenue for the three and six months ended June 30, 2007 includes ribavirin royalties of $19.0 million and $36.2 million respectively and a $19.2 million milestone payment received from Schering-Plough related to the out-licensing of pradefovir in the six months ended June 30, 2007.   Table 2 Valeant Pharmaceuticals International   GAAP Reconciliation of Basic and Diluted Earnings Per Share For the Three and Six Months Ended June 30, 2008 and 2007           Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share data) 2008 2007 2008 2007   Income (loss) from continuing operations $ (73,455 ) $ 21,880 $ (74,027 ) $ 35,403   Non-GAAP adjustments: Professional fees related to Special Committee option investigation (a) - - - 630 Restructuring, asset impairments and dispositions (b) 17,583 6,337 4,919 13,575 Product impairment (c) 85 310 85 310 Tax (d)   50,066     (14,026 )   59,727     (14,854 )       Adjusted income (loss) from continuing operations before the above charges $ (5,721 ) $ 14,501   $ (9,296 ) $ 35,064     Adjusted basic EPS from continuing operations $ (0.06 ) $ 0.15   $ (0.10 ) $ 0.37     Adjusted diluted EPS from continuing operations $ (0.06 ) $ 0.15   $ (0.10 ) $ 0.36     Shares used in adjusted basic per share calculation   89,802     95,049     89,696     94,911     Shares used in adjusted diluted per share calculation   89,802     96,154     89,696     96,090     (a) Non-recurring professional fees relating to the investigation by the Special Committee into stock option practices and the related restatement of financial statements.   (b) Net restructuring, asset impairments and dispositions for the three months ended June 30, 2008 of $17.6 million includes $6.5 million in employee related costs, $6.6 million of professional service fees and other cash expenses, $3.8 million relating to the divestitures of our operations in Asia and Argentina and asset impairments of $0.7 million. The six months ended June 30, 2008, includes a net gain on the sale of our operations in Asia of $35.9 million, offset by a loss on the sale of our operations in Argentina of $2.7 million, employee related costs of $18.0 million, professional service fees and other cash expenses of $11.5 million and asset impairments of $8.6 million. Restructuring for the three and six months ended June 30, 2007 relates to the restructuring announced in April 2006.   (c) Impairment on a certain product sold in Portugal.   (d) Tax effect for non-GAAP adjustments, including tax effects of the APB 23 revocation.     To supplement the consolidated financial results prepared in accordance with Generally Accepted Accounting Principles (GAAP), the company uses non-GAAP financial measures that exclude certain items, such as special charges and credits. Management does not consider the excluded items part of the day-to-day business or reflective of the core operational activities of the company as they result from transactions outside the ordinary course of business. Management uses non-GAAP financial measures internally for strategic decision making, forecasting future results and evaluating current performance. Guidance is provided only on a non-GAAP basis due to the inherent difficulty in forecasting such items.   By disclosing non-GAAP financial measures, management intends to provide investors with a more 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.   Table 3 Valeant Pharmaceuticals International Reconciliation of Consolidated Income From Operations to Non-GAAP Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") For the Three and Six Months Ended June 30, 2008 and 2007 (In thousands)   Three Months Ended   Six Months Ended June 30, June 30, 2008   2007 2008   2007   Consolidated income (loss) from operations (GAAP) $ (22,191 ) $ 18,800 $ (7,085 ) $ 46,038 Depreciation and amortization   23,606     22,740   46,495     44,136 EBITDA (non-GAAP) (a) 1,415 41,540 39,410 90,174 Other non-GAAP adjustments (b)   17,668     6,647   5,004     14,515   Adjusted EBITDA (non-GAAP) (a) $ 19,083   $ 48,187 $ 44,414   $ 104,689     (a) We believe that EBITDA and Adjusted EBITDA are meaningful non-GAAP financial measures as earnings-derived indicators of the cash flow generation ability of the company. We calculate EBITDA by adding depreciation and amortization back to consolidated income from operations. Adjusted EBITDA excludes the additional costs set forth in note (b) below. EBITDA and Adjusted EBITDA, as defined and presented by us, may not be comparable to similar measures reported by other companies.   (b) See Table 2 for explanation of non-GAAP adjustments.   Table 4 Valeant Pharmaceuticals International Supplemental Sales Information For the Three and Six Months Ended June 30, 2008 and 2007 (In thousands)             Three Months Ended % Six Months Ended % June 30, Increase/ June 30, Increase/ 2008 2007 (Decrease) 2008 2007 (Decrease) Neurology Mestinon® $ 12,754 $ 14,014 -9 % $ 24,285 $ 24,552 -1 % Diastat® AcuDial™ 8,833 12,386 -29 % 21,012 23,458 -10 % Cesamet® 9,678 6,859 41 % 19,674 12,770 54 % Librax® 3,832 4,455 -14 % 7,414 8,122 -9 % Other Neurology 30,797 28,670 7 % 53,792 53,446 1 %   Dermatology Efudix/Efudex® 11,972 17,515 -32 % 35,166 29,992 17 % Kinerase® 5,849 8,133 -28 % 11,459 16,511 -31 % Other Dermatology 15,068 16,977 -11 % 28,304 31,644 -11 %   Other Therapeutic Classes Bisocard 7,258 5,575 30 % 14,083 10,269 37 % Bedoyecta™ 9,604 12,237 -22 % 13,591 16,798 -19 % Solcoseryl 6,754 8,448 -20 % 13,039 13,795 -5 % Virazole® 3,361 3,045 10 % 8,857 8,564 3 % Other Pharmaceutical Products   66,198   63,273 5 %   123,195   119,599 3 %   Total product sales (a) $ 191,958 $ 201,587 -5 % $ 373,871 $ 369,520 1 %       Three Months Ended % Six Months Ended % June 30, Increase/ June 30, Increase/ 2008 2007 (Decrease) 2008 2007 (Decrease)   United States $ 40,795 $ 56,622 -28 % $ 99,358 $ 107,393 -7 % Mexico 29,917 34,818 -14 % 47,264 55,923 -15 % Canada 13,911 11,988 16 % 27,624 23,816 16 % Australia 7,426 6,377 16 % 11,660 9,391 24 % Brazil   5,922   4,992 19 %   9,817   9,029 9 %   97,971 114,797 -15 % 195,723 205,552 -5 %   WEEMEA (b) 50,473 45,918 10 % 91,152 85,396 7 % Central Europe (c) 41,117 31,230 32 % 80,924 61,811 31 % Other (a)   2,397   9,642 -75 %   6,072   16,761 -64 %   Total $ 191,958 $ 201,587 -5 % $ 373,871 $ 369,520 1 %   (a) Product sales for the three and six months ended June 30, 2008 include $2.3 million and $5.7 million for products which were divested in 2008, compared to $9.6 million and $16.8 million for the same periods in 2007. For the three and six months ended June 30, 2008, "Other" also includes $0.1 million and $0.4 million respectively for sales made in connection with our obligation to Invida.   (b)"WEEMEA" includes Western Europe, Eastern Europe, Middle East and Africa.   (c)"Central Europe" includes Poland, Hungary, Slovakia and Czech Republic.   Table 5 Valeant Pharmaceuticals International   Consolidated Condensed Statement of Revenue and Operating Income - Regional For the Three and Six Months Ended June 30, 2008 and 2007 (In thousands)             Three Months Ended     Six Months Ended   June 30, June 30, Revenues 2008   2007 % Change 2008   2007 % Change   North America $ 54,706 $ 68,610 -20 % $ 126,982 $ 131,209 -3 % International 45,662 55,829 -18 % 74,813 91,104 -18 % EMEA   91,590     77,148   19 %   172,076     147,207   17 % Total specialty pharmaceuticals 191,958 201,587 -5 % 373,871 369,520 1 %   Alliance revenue (including ribavirin royalties) (a)   14,805     18,955   -22 %   27,578     55,425   -50 %   Consolidated revenues $ 206,763   $ 220,542   -6 % $ 401,449   $ 424,945   -6 %   Cost of goods sold $ 69,479   $ 57,614   21 % $ 124,369   $ 104,515   19 %   Gross profit margin on pharmaceutical sales   64 %   71 %   67 %   72 %     Three Months Ended Six Months Ended June 30, June 30, Income (Loss) From Operations 2008 2007 % Change 2008 2007 % Change     North America $ 8,035 $ 26,464 -70 % $ 35,448 $ 43,795 -19 % International 7,357 8,341 -12 % 4,704 8,614 -45 % EMEA   (1,247 )   15,902   --   9,840     34,611   -72 % 14,145 50,707 -72 % 49,992 87,020 -43 %   Corporate expenses $ (8,272 ) $ (19,948 ) -59 % $ (23,699 ) $ (35,908 ) -34 %   Total specialty pharmaceuticals 5,873 30,759 -81 % 26,293 51,112 -49 %   Restructuring, asset impairments and dispositions (17,583 ) (6,337 ) 177 % (4,919 ) (13,575 ) -64 % Research and development costs   (10,481 )   (5,622 ) 86 %   (28,459 )   8,501   --   Total consolidated income (loss) from operations $ (22,191 ) $ 18,800   $ (7,085 ) $ 46,038               Three Months Ended       Six Months Ended   June 30, June 30, Gross Profit (net of amortization) 2008   %   2007 % 2008   %   2007 %     North America $ 34,263 63 % $ 51,819 76 % $ 86,808 68 % $ 96,618 74 % International 26,331 58 % 32,438 58 % 41,829 56 % 53,331 59 % EMEA   46,136 50 %   44,136 57 %   89,414 52 %   85,080 58 %   Total specialty pharmaceuticals $ 106,730 56 % $ 128,393 64 % $ 218,051 58 % $ 235,029 64 %   (a) Alliance revenue for the three and six months ended June 30, 2008 relates to ribavirin royalty of $14.8 million and $27.5 million respectively. Alliance revenue for the six months ended June 30, 2008 also includes a $0.1 million payment from an unrelated third party for a license to certain intellectual property assets. Alliance revenue for the three and six months ended June 30, 2007 includes ribavirin royalties of $19.0 million and $36.2 million respectively and a $19.2 million milestone payment received from Schering-Plough related to the out-licensing of pradefovir in the six months ended June 30, 2007.   (b) The specialty pharmaceutical product amortization included in this calculation of gross profit (net of amortization) excludes the amortization of the ribavirin intangible of $2.4 million and $4.7 million for the three and six months ended June 30, 2008 and $3.1 million and $6.2 million for the three and six months ended June 30, 2007.   Table 6 Valeant Pharmaceuticals International Consolidated Balance Sheet and Other Data (In thousands)     As of         As of June 30, December 31, Balance Sheet Data 2008 2007   Cash and cash equivalents $ 466,300 $ 309,365 Marketable securities   83,684   52,122   Total cash and marketable securities $ 549,984 $ 361,487     Accounts receivable, net $ 169,143 $ 191,796 Inventory, net 119,185 115,177 Long-term debt 780,963 782,552     Other Data Six Months Ended June 30, 2008 2007 Cash flow provided by (used in):   Operating activities $ 65,169 $ 62,072 Investing activities 16,917 14,171 Financing activities and discontinued operations 57,888 (32,398 ) Effect of exchange rate changes on cash and cash equivalents   16,961   7,547     Net increase in cash and cash equivalents 156,935 51,392 Net increase (decrease) in marketable securities   31,562   (488 )   Net increase in cash and marketable securities $ 188,497 $ 50,904     Table 7 Valeant Pharmaceuticals International   Supplemental Non-GAAP Information on Currency Effect (In thousands)           Three Months Ended Six Months Ended June 30, June 30, 2008 2007 2008 2007 Consolidated   Product sales $ 191,958 $ 201,587 $ 373,871 $ 369,520 Currency effect (16,756 ) (30,739 ) Product sales, excluding currency impact $ 175,202 $ 343,132   Operating income (loss) $ (22,191 ) $ 18,800 $ (7,085 ) $ 46,038 Currency effect 754 (2,906 ) Operating loss, excluding currency impact $ (21,437 ) $ (9,991 )   Geographic Product Sales   North America pharmaceuticals $ 54,706 $ 68,610 $ 126,982 $ 131,209 Currency effect (1,168 ) (3,117 ) North America pharmaceuticals, excluding currency impact $ 53,538 $ 123,865   International pharmaceuticals $ 45,662 $ 55,829 $ 74,813 $ 91,104 Currency effect (3,019 ) (4,711 ) International pharmaceuticals, excluding currency impact $ 42,643 $ 70,102   EMEA pharmaceuticals $ 91,590 $ 77,148 $ 172,076 $ 147,207 Currency effect (12,569 ) (22,911 ) EMEA pharmaceuticals, excluding currency impact $ 79,021 $ 149,165   Note: Currency effect is determined by comparing adjusted 2008 reported amounts, calculated using 2007 monthly average exchange rates, to the actual 2007 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.