Valeant Pharmaceuticals Purpose Vii: Kickoff Notes On The Especial Conference Call
Valeant Pharmaceuticals yesterday held its "facts-based" conference call. There were plausible denials of several things that have got been suggested inwards this weblog together with 1 apartment acceptance.
The starting fourth dimension observation is that Valeant's CEO Mike Pearson together with I handle on the basic accounting number at Valeant. [We have got unlike views on the end-result.]
At the 2d Valeant is loss making together with if you lot expression at their GAAP cash flows versus $17 billion inwards debt Valeant looks similar it is going bust. Valeant has asked you lot to expression non at GAAP EPS but at non-GAAP "cash EPS" which is internet of one-time charges. If you lot believe the one-time accuse number represents truthful one-time charges together with so you lot believe the Valeant story. If withal ordinary expenses are pose inwards the one-time accuse number together with so you lot produce non believe the "cash EPS number".
Here is Mr Pearson, from yesterday talking almost how the acquisition squad powerfulness non hold out able to produce many acquisitions whilst they are awaiting the lawsuit of the Allergan deal:
It is of class possible that some of the 1 fourth dimension charges are inwards fact one-time together with just about are inwards fact ordinary expenses that are misclassified every bit one-off. In that example the truth lies somewhere betwixt GAAP numbers (large together with increasing losses) together with the non-GAAP "cash EPS".
Indeed I mean value that is the probable lawsuit together with was consistent amongst the conference call. Again I volition stick to the Medicis merger.
There were just about definite one-time charges. $109.4 1 chiliad 1000 of the expenses on the Medicis merger were to fund layoffs. Even if I were to quibble almost redundancies at the border I would hold out forced to acknowledge that most of those were by together with large indeed one-off. [They did bring a lot of redundancies - likely also many every bit they admitted later inwards the call.] Adjusting EPS past times these one-time charges appears reasonable.
However it appears that I was exclusively correct almost the Scuptura/Galderma royalty every bit per Post IIIA.
To quote:
Lets read this. Valeant believed that when nosotros bought the production from Sanofi at that spot were no royalty obligations to whatever 3rd party. Galderma sued together with Valeant settled for cash including an up-front payment of $15 1 chiliad 1000 together with annual royalties of 5%. Now if at that spot were no royalty obligations together with so Valeant would non commonly settle. [This suggests at a minimum Valeant does non have got an adequate patent database together with patent lawyers.]
Having settled Valeant charged to one-time expenses $15 1 chiliad 1000 plus $24.2 1 chiliad 1000 for futurity payments every bit a legal settlement. The $24.2 1 chiliad 1000 was the introduce value of futurity royalties they powerfulness have got to pay. Now every bit they sell Sculptura they tape every bit continuing income all sales but the royalties on those sales acquire netted off the 24.2 1 chiliad 1000 they recorded. This is to a greater extent than or less exactly the proposition I made. Income goes through the cash-EPS number, together with expenses associated amongst that income acquire through the one-off accuse line.
Moreover they have got non yet paid out much of this Sculptura royalty - they soundless have, on their residuum sheet, a liability for over $20 1 chiliad 1000 - the futurity value of Sculptura royalties. They volition cancel that every bit business office of the sale of the aesthetics assets to Galderma. [So forthwith at that spot volition hold out non-cash proceeds of property sales.]
One cockroach, how many more?
The excess redundancies at Medicis
Mike Pearson admitted inwards the conference telephone telephone that redundancies inwards the sales forcefulness at Medicis were inappropriate. Talking almost potential redundancies at Allergan:
This completely matches your intuition (if they sack roughly 100 per centum of the staff amongst an acquired fellowship they volition sack sales staff together with the sales volition acquire down). It also matches the scuttlebutt I have got heard (the Medicis acquisition was a mess amongst abide by to sales together with contact amongst dermatologists). However it is contrary to previous comments past times Mike Pearson.
In the starting fourth dimension quarter 2013 conference telephone telephone they told us these brands were doing peachy (that is just after they sacked the sales force):
In the 2d quarter of 2013 the products were doing peachy too:
They were doing peachy every bit belatedly every bit the starting fourth dimension quarter of 2014.
These are 1 time again the Medicis products.
Mike Pearson together with so adds:
This is the sales forcefulness that was originally fired beingness replaced. They genuinely did demand to rehire a dermatology sales force.
This is strange. Sales were peachy together with increased marketplace portion every quarter after the Medicis acquisition but Mike Pearson admits that it was a error to touching the sales forcefulness together with they needed to rehire sales people.
I have got tried together with tried to foursquare the circle but I can't. There remains 1 tantalizing possibility - together with that is that they just changed the Definition of a sale (and hence reported growth where at that spot was none). This is somewhat supported past times SEC filings. The 2013 Form 10-K discloses:
This is such a bold alter inwards revenue recognition that it raised questions from the SEC who asked Valeant almost it inwards formal letters (filed on the SEC site). The enquiry asked is below:
You tin john uncovering the enquiry together with answer provided past times the fellowship at this link. For students of revenue-recognition accounting the answer is apartment funny (disguised inwards turgid prose).
Anyway, it seems they reported marketplace portion growth inwards business office past times changing the Definition of sales.
And together with so they promise to solve that employment long term past times hiring 100 sales people to supervene upon the ones they fired.
John
Finally I should annotation that I am going to Europe by together with large to come across amongst companies that nosotros are invested inwards or powerfulness invest in. We are also coming together just about clients. The frequency of posts on Valeant together with other matters is probable to tedious down.
The starting fourth dimension observation is that Valeant's CEO Mike Pearson together with I handle on the basic accounting number at Valeant. [We have got unlike views on the end-result.]
At the 2d Valeant is loss making together with if you lot expression at their GAAP cash flows versus $17 billion inwards debt Valeant looks similar it is going bust. Valeant has asked you lot to expression non at GAAP EPS but at non-GAAP "cash EPS" which is internet of one-time charges. If you lot believe the one-time accuse number represents truthful one-time charges together with so you lot believe the Valeant story. If withal ordinary expenses are pose inwards the one-time accuse number together with so you lot produce non believe the "cash EPS number".
Here is Mr Pearson, from yesterday talking almost how the acquisition squad powerfulness non hold out able to produce many acquisitions whilst they are awaiting the lawsuit of the Allergan deal:
Mr Pearson: I mean value a fleck of a argent lining inwards this inwards that [Valeant are] non doing whatever other pregnant acquisitions at this time, volition hateful that our fiscal statements volition genuinely start to genuinely demonstrate that our one-time costs are genuinely one-time costs. And that you'll start to consider that GAAP together with non-GAAP EPS together with organic growth. Everyone volition consider that the concern model is working.
It is of class possible that some of the 1 fourth dimension charges are inwards fact one-time together with just about are inwards fact ordinary expenses that are misclassified every bit one-off. In that example the truth lies somewhere betwixt GAAP numbers (large together with increasing losses) together with the non-GAAP "cash EPS".
There were just about definite one-time charges. $109.4 1 chiliad 1000 of the expenses on the Medicis merger were to fund layoffs. Even if I were to quibble almost redundancies at the border I would hold out forced to acknowledge that most of those were by together with large indeed one-off. [They did bring a lot of redundancies - likely also many every bit they admitted later inwards the call.] Adjusting EPS past times these one-time charges appears reasonable.
However it appears that I was exclusively correct almost the Scuptura/Galderma royalty every bit per Post IIIA.
To quote:
Howard Schiller (CFO): And 1 final assertion that I would similar to address relates to royalties on Sculptra. There had been statements that this royalty to Galderma was an obligation that existed when nosotros acquired the production from Sanofi inwards Dec 2011 together with that nosotros after prepaid this royalty together with charged it off every bit an acquisition-related cost at the fourth dimension of the Medicis acquisition. The fact is that when nosotros acquired Sculptra from Sanofi, at that spot was no royalty obligation to whatever 3rd party. In the autumn of 2012, Galderma sued to enjoin Valeant's acquisition of Medicis, together with Valeant later entered into a short town amongst Galderma to allow the acquisition to hold out completed. The short town included $15 1 chiliad 1000 inwards upfront payments together with a 5% annual payment on worldwide sales to Sculptra. Because Valeant did non have whatever additional rights associated amongst Restylane, Perlane or Sculptra, both the $15 1 chiliad 1000 upfront payment together with the fair value of the futurity payments of $24.2 1 chiliad 1000 were recorded every bit acquisition-related costs during the 4th quarter 2012. Of the $24.2 1 chiliad 1000 that was reported, $2.6 1 chiliad 1000 has been paid to date. The royalty obligation volition hold out eliminated upon the sale of the Valeant injectable aesthetics concern to Galderma, together with the remaining residuum volition hold out reversed every bit a credit to acquisition-related costs at unopen together with volition non hold out included inwards cash EPS.
Lets read this. Valeant believed that when nosotros bought the production from Sanofi at that spot were no royalty obligations to whatever 3rd party. Galderma sued together with Valeant settled for cash including an up-front payment of $15 1 chiliad 1000 together with annual royalties of 5%. Now if at that spot were no royalty obligations together with so Valeant would non commonly settle. [This suggests at a minimum Valeant does non have got an adequate patent database together with patent lawyers.]
Having settled Valeant charged to one-time expenses $15 1 chiliad 1000 plus $24.2 1 chiliad 1000 for futurity payments every bit a legal settlement. The $24.2 1 chiliad 1000 was the introduce value of futurity royalties they powerfulness have got to pay. Now every bit they sell Sculptura they tape every bit continuing income all sales but the royalties on those sales acquire netted off the 24.2 1 chiliad 1000 they recorded. This is to a greater extent than or less exactly the proposition I made. Income goes through the cash-EPS number, together with expenses associated amongst that income acquire through the one-off accuse line.
Moreover they have got non yet paid out much of this Sculptura royalty - they soundless have, on their residuum sheet, a liability for over $20 1 chiliad 1000 - the futurity value of Sculptura royalties. They volition cancel that every bit business office of the sale of the aesthetics assets to Galderma. [So forthwith at that spot volition hold out non-cash proceeds of property sales.]
One cockroach, how many more?
The excess redundancies at Medicis
Mike Pearson admitted inwards the conference telephone telephone that redundancies inwards the sales forcefulness at Medicis were inappropriate. Talking almost potential redundancies at Allergan:
Mike Pearson: We innovation to maintain -- 1 thing that we've learned inwards the Medicis together with B+L acquisitions is don't touching the sales force, right? I mean value inwards Medicis, nosotros did touching the sales force, together with that was problematic for a current of time. Our sales forcefulness inwards dermatology forthwith has been stable for a few quarters, together with quite frankly, all of our promoted products inwards dermatology are growing. And so that was a lesson nosotros learned.
This completely matches your intuition (if they sack roughly 100 per centum of the staff amongst an acquired fellowship they volition sack sales staff together with the sales volition acquire down). It also matches the scuttlebutt I have got heard (the Medicis acquisition was a mess amongst abide by to sales together with contact amongst dermatologists). However it is contrary to previous comments past times Mike Pearson.
In the starting fourth dimension quarter 2013 conference telephone telephone they told us these brands were doing peachy (that is just after they sacked the sales force):
Mike Pearson: ...Again, the Medicis brands that -- permit me acquire through againat just about portion. You don't have got a slide to bring a expression at, but every bit I acquire to the Medicis brands, Ziana together with Solodyn are both performing at expectation. Zyclara is a niggling fleck behind together with the Dysport, Restylane together with Perlane, which are the aesthetics brands are performing ahead of expectations. In price of what's happening inwards the marketplace, pricing is largely staying the same. We did bring a cost increment on Restylane inwards the starting fourth dimension quarter of almost 10%.
In the 2d quarter of 2013 the products were doing peachy too:
Mike Pearson: I am pleased to written report that our aesthetics franchise has its best quarter since Medicis launched its aesthetic products. In particular, Dysport had its best quarter always together with gained pregnant marketplace portion against BOTOX together with Xeomin.
They were doing peachy every bit belatedly every bit the starting fourth dimension quarter of 2014.
Mike Pearson: In aesthetics, I know at that spot were just about comments based on just about survey inwards price of our share. Our injectable sales, which would include Dysport together with our fillers inwards the starting fourth dimension quarter inwards the United States, grew 15%. I mean value I heard somewhere that it was cited the marketplace grew at 11%. So I'm non familiar amongst that survey, but that would advise we're gaining share, non losing shares. So nosotros had rattling strong functioning on the aesthetics side, continuous strong performance.
These are 1 time again the Medicis products.
Mike Pearson together with so adds:
And that's before the send on of the extra 100 people nosotros have got forthwith hired.
This is the sales forcefulness that was originally fired beingness replaced. They genuinely did demand to rehire a dermatology sales force.
This is strange. Sales were peachy together with increased marketplace portion every quarter after the Medicis acquisition but Mike Pearson admits that it was a error to touching the sales forcefulness together with they needed to rehire sales people.
I have got tried together with tried to foursquare the circle but I can't. There remains 1 tantalizing possibility - together with that is that they just changed the Definition of a sale (and hence reported growth where at that spot was none). This is somewhat supported past times SEC filings. The 2013 Form 10-K discloses:
In 2012, consistent amongst legacy Medicis’ historical approach, nosotros recognized revenue on those products upon shipment from McKesson, our primary U.S. distributor of aesthetics products, to physicians. As business office of our integration efforts, nosotros implemented novel strategies together with concern practices inwards the starting fourth dimension quarter of 2013, peculiarly every bit they relate to rebate together with discount programs for these aesthetics products. As a outcome of these changes, the criteria for revenue recognition are achieved upon shipment of these products to McKesson, and, therefore, nosotros began, inwards the starting fourth dimension quarter of 2013, recognizing revenue upon shipment of these products to McKesson.
This is such a bold alter inwards revenue recognition that it raised questions from the SEC who asked Valeant almost it inwards formal letters (filed on the SEC site). The enquiry asked is below:
SEC Question: You expose that you lot changed the revenue recognition physical care for for several brands acquired inwards your concern combination amongst Medicis to forthwith recognize this revenue upon shipment to your distributor instead of when this distributor ships products to physicians. Please supply us your analysis supporting this alter inwards revenue recognition. In your response, delight tell us why administration of Medicis delayed recognition together with what has changed, including what additional information you lot have, to permit you lot to recognize revenue for these products before than nether Medicis’ policy.
You tin john uncovering the enquiry together with answer provided past times the fellowship at this link. For students of revenue-recognition accounting the answer is apartment funny (disguised inwards turgid prose).
Anyway, it seems they reported marketplace portion growth inwards business office past times changing the Definition of sales.
And together with so they promise to solve that employment long term past times hiring 100 sales people to supervene upon the ones they fired.
John
Finally I should annotation that I am going to Europe by together with large to come across amongst companies that nosotros are invested inwards or powerfulness invest in. We are also coming together just about clients. The frequency of posts on Valeant together with other matters is probable to tedious down.
No comments