Valeant Pharmaceuticals: Business Office Iiia: Corrections Together With Amplifications On The Medicis Restructuring Charges
This shipping service contains corrections together with amplifications to together with of the previous shipping service - which is why it labelled Part IIIA. This is a serial - it volition assist to start at the beginning. Here are the links: Part I, Part II together with Part III.
Part III of this serial went to the centre of the issue.
John
Part III of this serial went to the centre of the issue.
As shown inwards Part II, Valeant Pharmaceuticals makes huge together with increasing losses after very large restructuring together with other one-off expenses. If the GAAP accounts are the starting fourth dimension together with terminate of the even together with so Valeant is headed for bankruptcy. It has large together with increasing losses together with $17 billion inwards debt.
If the restructuring together with other one-off expenses are genuinely "one-off" together with so you lot believe the Valeant story. Profits internet of these "one-offs" are large together with rising. GAAP EPS (currently a loss) volition ascent explosively when one-off expenses larn away. Consensus (guidance) earnings predictions receive got this explosive character.
If the restructuring charges are non "one-off" together with so Valeant is a Wizard-of-Oz type con on the markets where it looks really great if you lot ignore ordinary recurring expense because it is classified equally non-recurring.
We demand to piece of work out - what - if whatsoever - of the literally billions of dollars of "one-off" expense is really ordinary expense inwards disguise...
Alas that is really hard to exercise - because - frankly - at that spot is non plenty disclosure equally what is inwards the "one-off" bucket. So I exercise it amongst abide by to exclusively 1 merger - the Medicis Merger. That was the dependent area of Part III.
Comments on Part III
We demand to piece of work out - what - if whatsoever - of the literally billions of dollars of "one-off" expense is really ordinary expense inwards disguise...
Alas that is really hard to exercise - because - frankly - at that spot is non plenty disclosure equally what is inwards the "one-off" bucket. So I exercise it amongst abide by to exclusively 1 merger - the Medicis Merger. That was the dependent area of Part III.
Comments on Part III
In Part III I assessed the restructuring charges amongst abide by to the Medicis merger together with whether they were plausibly one-off. I idea they were also large relative to both the job base of operations together with balance canvas of Medicis to live plausible one-off charges. This leads me to the Wizard-of-Oz trend determination but other people (see the fighting inwards the comments) were willing to convey those restructuring charges equally genuinely one-off.
I desire to larn through the issues raised both privately together with inwards the populace comments. Alas at that spot are lots of deep-dives into hard disclosures. I am going to travail to brand this equally painless for both me together with you lot equally possible.
I stand upwards past times my determination though that is probable that one-off expenses are existence dumped into the restructuring charges - together with I demonstrate amongst a clear representative of royalties paid to Galderma on an ongoing production (Sculptra).
I desire to larn through the issues raised both privately together with inwards the populace comments. Alas at that spot are lots of deep-dives into hard disclosures. I am going to travail to brand this equally painless for both me together with you lot equally possible.
I stand upwards past times my determination though that is probable that one-off expenses are existence dumped into the restructuring charges - together with I demonstrate amongst a clear representative of royalties paid to Galderma on an ongoing production (Sculptra).
--
Employee numbers at Medicis prior to the acquisition
One of the to a greater extent than damming allegations inwards the final shipping service was that Valeant provided for employee outcome costs payable to merely about 750 employees of the Company together with Medicis who receive got been or volition live terminated equally a effect of the Medicis acquisition. I noted that the closed the bargain equally per ii Dec 2011. So that number provided inwards 2012 should have included the Graceway personnel (about 200 I gather). There is some uncertainty equally to whether it did include the Graceway personnel. The last 10-Q of Medicis talks well-nigh 770 employees not including R&D functions. There may receive got been 900 employees so firing 750 is - I guess - theoretically possible albeit extremely aggressive. Just working through the numbers it is probable that to a greater extent than than 100 of those fired were inwards sales - together with many of the products were out of patent (which agency competition). Losing the employee who visits the doctors business office (when the rival is doing so) is likely negative for sales - but that is the dependent area of futurity posts.
--
The breakdown of acquisition costs inwards the 2013 cast 10-K
There is a breakdown inwards the 2013 Form 10-K of the integration costs related to the Medicis acquisition. I quote:
* 109.2 1 G m of restructuring expense,
* 32.2 1 G m of acquisition related costs
* a farther 24.2 1 G m of "acquisition-related costs recognized inwards the 4th quarter of 2012 related to royalties to live paid to Galderma S.A. on sales of Sculptra®," [I volition larn dorsum to this.]
* a farther $39.9 1 G m of integration costs.
Also at that spot are $77.3 1 G m of acceleration of unvested stock options recognised together with paid inwards the 4th quarter of 2012. That adds upwards to 205 1 G m plus the additional $77.3 1 G m which really looks similar buy consideration. Its a piddling shy of the $275 1 G m originally suggested unless you lot include the buy consideration.
Many people suggested my calculation equally to whether this accuse was featherbrained should receive got allowed for substantial lease breaking costs together with the like. There is a tabular array inwards the cast 10-K which dismisses that but which does non quite reconcile amongst the numbers above.
Whatever: contract outcome is trivial - nether $4 1 G m inwards a really large restructuring pool.
More interesting though is what is not included inwards this table. We higher upwards calculated that $205 1 G m of restructuring expenses were incurred plus the percentage based compensation, together with this tabular array contains less than $110 1 G m of those expenses.
Acquisition-related costs recognized inwards the 4th quarter of 2012 related to royalties on sales of Sculptra
The mischief alleged inwards Post III is that ordinary expenses are existence dumped inwards the restructuring budget important the GAAP earnings, non the GAAP earnings internet of restructuring charges are the to a greater extent than accurate way of assessing this business.
There is a disclosure higher upwards I needed to read twice to understand. It says that they receive got categorized equally a one-off expense related to the Medicis merger $24.2 1 G m royalties to live paid to Galderma S.A. on sales of Sculptra.
Sculptra came amongst the acquisition of Dermik Pharmaceuticals from Sanofi for $425 1 G m - it is hard to come across how these are restructuring expenses related to the Medicis merger. Sculptura was ever dependent area to royalty payments to live made to Galderma. Those royalties were paid inwards advance equally portion of a legal short town amongst Galderma. So - guess what? They classified them equally a "one-off" expense.
Now this is clearly stretching it. The revenue from selling those pharmaceuticals is ordinary income. The expense associated amongst selling them is classified equally "non recurring". This is a defining representative of the mischief that I believe is happening at Valeant. The fellowship is explaining away its losses (yes GAAP losses) past times scream for you lot to ignore sure as shooting expenses equally "one-off" together with those expenses include expenses necessary to sell drugs that they sell on an ongoing basis.
What are the other expenses?
As noted the tabular array higher upwards includes exclusively $105 1 G m of $205 1 G m of so called "one-off" expenses incurred. $24.2 1 G m of the residual was what I am pretty sure as shooting was ordinary recurring expenses (royalties on products they sell). Is the repose also mislabelled "one-off"? You can't tell equally no information is provided.
The Trust Me story
Ultimately this is a trust-me story. In Valeant, together with its CEO Mike Pearson nosotros must trust.
The GAAP accounts for Valeant demonstrate large together with increasing losses. They receive got $17 billion inwards debt.
If the GAAP accounts are the starting fourth dimension together with the terminate of the even together with so Valeant is headed to bankruptcy court.
Valeant's CEO together with investor relations portion desire you lot to ignore the GAAP accounts. They course of written report quite literally billions of dollars of expense equally "one-off" together with inquire you lot to ignore that expense together with hold off at the earnings internet of "one-off" expenses.
At no dot does the auditor audit the disceptation that they are one-off expenses. You demand to trust the management, the CEO together with the information they laissez passer you. It is a trust me story.
This weblog serial has shown reasons for non trusting.
Part III demonstrated that the expenses associated amongst the Medicis merger were really large relative to the employee together with upper-case alphabetic lineament bases of Medicis. This portion made modest fry corrections (the employee base of operations of Medicis was larger than indicated inwards Part III) but also demonstrated that the large expenses were non associated amongst breaking contracts or facility closure (as suggested past times some of my critics).
Moreover this portion showed some expenses classified equally one-off (royalties) were probable to live recurring expenses together with thus misclassified. That gives you lot argue to uncertainty the management when, to a greater extent than generally, they tell you lot should assess Valeant internet of billions of dollars of restructuring expenses.
In futurity posts I volition to a greater extent than straight assay out the credibility of Mike Pearson. Till then, happy reading together with comments (positive together with negative) are appreciated.
Employee numbers at Medicis prior to the acquisition
One of the to a greater extent than damming allegations inwards the final shipping service was that Valeant provided for employee outcome costs payable to merely about 750 employees of the Company together with Medicis who receive got been or volition live terminated equally a effect of the Medicis acquisition. I noted that the closed the bargain equally per ii Dec 2011. So that number provided inwards 2012 should have included the Graceway personnel (about 200 I gather). There is some uncertainty equally to whether it did include the Graceway personnel. The last 10-Q of Medicis talks well-nigh 770 employees not including R&D functions. There may receive got been 900 employees so firing 750 is - I guess - theoretically possible albeit extremely aggressive. Just working through the numbers it is probable that to a greater extent than than 100 of those fired were inwards sales - together with many of the products were out of patent (which agency competition). Losing the employee who visits the doctors business office (when the rival is doing so) is likely negative for sales - but that is the dependent area of futurity posts.
--
The breakdown of acquisition costs inwards the 2013 cast 10-K
There is a breakdown inwards the 2013 Form 10-K of the integration costs related to the Medicis acquisition. I quote:
We estimated that nosotros volition incur full costs of less than $250 1 G m inwards connection amongst these cost-rationalization together with integration initiatives, which were substantially completed past times the terminate of 2013. However, sure as shooting costs may however live incurred inwards 2014. Since the acquisition date, full costs of $181.3 1 G m (including (i) $109.2 1 G m of restructuring expenses, (ii) $32.2 1 G m of acquisition-related costs, which excludes $24.2 1 G m of acquisition-related costs recognized inwards the 4th quarter of 2012 related to royalties to live paid to Galderma S.A. on sales of Sculptra®, together with (iii) $39.9 1 G m of integration expenses) receive got been incurred through Dec 31, 2013. The estimated costs primarily include: employee outcome costs payable to merely about 750 employees of the Company together with Medicis who receive got been terminated equally a effect of the Medicis Acquisition; IPR&D outcome costs related to the transfer to other parties of product-development programs that did non align amongst our query together with evolution model; costs to consolidate or unopen facilities together with relocate employees; together with contract outcome together with lease cancellation costs. These estimates exercise non include a accuse of $77.3 1 G m recognized together with paid inwards the 4th quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, together with percentage appreciation rights for Medicis employees that was triggered past times the modify inwards control.This requires a piddling reading together with comprehension - so lets interruption it the expenses really incurred to date.
* 109.2 1 G m of restructuring expense,
* 32.2 1 G m of acquisition related costs
* a farther 24.2 1 G m of "acquisition-related costs recognized inwards the 4th quarter of 2012 related to royalties to live paid to Galderma S.A. on sales of Sculptra®," [I volition larn dorsum to this.]
* a farther $39.9 1 G m of integration costs.
Also at that spot are $77.3 1 G m of acceleration of unvested stock options recognised together with paid inwards the 4th quarter of 2012. That adds upwards to 205 1 G m plus the additional $77.3 1 G m which really looks similar buy consideration. Its a piddling shy of the $275 1 G m originally suggested unless you lot include the buy consideration.
Many people suggested my calculation equally to whether this accuse was featherbrained should receive got allowed for substantial lease breaking costs together with the like. There is a tabular array inwards the cast 10-K which dismisses that but which does non quite reconcile amongst the numbers above.
The next tabular array summarizes the major components of restructuring costs incurred inwards connection amongst Medicis Acquisition-related initiatives through December 31, 2013:
Employee Termination Costs | IPR&D Termination Costs | Contract Termination, Facility Closure and Other Costs | ||||||||||||||||||
Severance and Related Benefits | Share-Based Compensation(1) | Total | ||||||||||||||||||
Balance, January 1, 2012 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Costs incurred and/or charged to expense | 85,253 | 77,329 | — | 370 | 162,952 | |||||||||||||||
Cash payments | (77,975 | ) | (77,329 | ) | — | (5 | ) | (155,309 | ) | |||||||||||
Non-cash adjustments | 4,073 | — | — | (162 | ) | 3,911 | ||||||||||||||
Balance, December 31, 2012 | 11,351 | — | — | 203 | 11,554 | |||||||||||||||
Costs incurred and/or charged to expense | 20,039 | — | — | 3,550 | 23,589 | |||||||||||||||
Cash payments | (31,409 | ) | — | — | (3,575 | ) | (34,984 | ) | ||||||||||||
Non-cash adjustments | 275 | — | — | (178 | ) | 97 | ||||||||||||||
Balance, December 31, 2013 | $ | 256 | $ | — | $ | — | $ | — | $ | 256 | ||||||||||
____________________________________
(1) | Relates to the acceleration of unvested stock options, restricted stock awards, together with percentage appreciation rights for Medicis employees that was triggered past times the modify inwards control. |
Whatever: contract outcome is trivial - nether $4 1 G m inwards a really large restructuring pool.
More interesting though is what is not included inwards this table. We higher upwards calculated that $205 1 G m of restructuring expenses were incurred plus the percentage based compensation, together with this tabular array contains less than $110 1 G m of those expenses.
Acquisition-related costs recognized inwards the 4th quarter of 2012 related to royalties on sales of Sculptra
The mischief alleged inwards Post III is that ordinary expenses are existence dumped inwards the restructuring budget important the GAAP earnings, non the GAAP earnings internet of restructuring charges are the to a greater extent than accurate way of assessing this business.
There is a disclosure higher upwards I needed to read twice to understand. It says that they receive got categorized equally a one-off expense related to the Medicis merger $24.2 1 G m royalties to live paid to Galderma S.A. on sales of Sculptra.
Sculptra came amongst the acquisition of Dermik Pharmaceuticals from Sanofi for $425 1 G m - it is hard to come across how these are restructuring expenses related to the Medicis merger. Sculptura was ever dependent area to royalty payments to live made to Galderma. Those royalties were paid inwards advance equally portion of a legal short town amongst Galderma. So - guess what? They classified them equally a "one-off" expense.
Now this is clearly stretching it. The revenue from selling those pharmaceuticals is ordinary income. The expense associated amongst selling them is classified equally "non recurring". This is a defining representative of the mischief that I believe is happening at Valeant. The fellowship is explaining away its losses (yes GAAP losses) past times scream for you lot to ignore sure as shooting expenses equally "one-off" together with those expenses include expenses necessary to sell drugs that they sell on an ongoing basis.
What are the other expenses?
As noted the tabular array higher upwards includes exclusively $105 1 G m of $205 1 G m of so called "one-off" expenses incurred. $24.2 1 G m of the residual was what I am pretty sure as shooting was ordinary recurring expenses (royalties on products they sell). Is the repose also mislabelled "one-off"? You can't tell equally no information is provided.
The Trust Me story
Ultimately this is a trust-me story. In Valeant, together with its CEO Mike Pearson nosotros must trust.
The GAAP accounts for Valeant demonstrate large together with increasing losses. They receive got $17 billion inwards debt.
If the GAAP accounts are the starting fourth dimension together with the terminate of the even together with so Valeant is headed to bankruptcy court.
Valeant's CEO together with investor relations portion desire you lot to ignore the GAAP accounts. They course of written report quite literally billions of dollars of expense equally "one-off" together with inquire you lot to ignore that expense together with hold off at the earnings internet of "one-off" expenses.
At no dot does the auditor audit the disceptation that they are one-off expenses. You demand to trust the management, the CEO together with the information they laissez passer you. It is a trust me story.
This weblog serial has shown reasons for non trusting.
Part III demonstrated that the expenses associated amongst the Medicis merger were really large relative to the employee together with upper-case alphabetic lineament bases of Medicis. This portion made modest fry corrections (the employee base of operations of Medicis was larger than indicated inwards Part III) but also demonstrated that the large expenses were non associated amongst breaking contracts or facility closure (as suggested past times some of my critics).
Moreover this portion showed some expenses classified equally one-off (royalties) were probable to live recurring expenses together with thus misclassified. That gives you lot argue to uncertainty the management when, to a greater extent than generally, they tell you lot should assess Valeant internet of billions of dollars of restructuring expenses.
In futurity posts I volition to a greater extent than straight assay out the credibility of Mike Pearson. Till then, happy reading together with comments (positive together with negative) are appreciated.
John
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