Valeant Pharmaceuticals: Part IIIA: Corrections And Amplifications On The Medicis Restructuring Charges

This post contains corrections and amplifications to and of the previous post - which is why it labelled Part IIIA. This is a series - it will help to start at the beginning. Here are the links: Part I,Part II and Part III.

Part III of this series went to the core of the issue.

As shown in Part II, Valeant Pharmaceuticals makes huge and increasing losses after very large restructuring and other one-off expenses. If the GAAP accounts are the beginning and end of the story then Valeant is headed for bankruptcy. It has large and increasing losses and $17 billion in debt.

If the restructuring and other one-off expenses are truly "one-off" then you believe the Valeant story. Profits net of these "one-offs" are large and rising. GAAP EPS (currently a loss) will rise explosively when one-off expenses go away. Consensus (guidance) earnings predictions have this explosive character.

If the restructuring charges are not "one-off" then Valeant is a Wizard-of-Oz type con on the markets where it looks really great if you ignore ordinary recurring expense because it is classified as non-recurring.

We need to work out - what - if any - of the literally billions of dollars of "one-off" expense is really ordinary expense in disguise...

Alas that is very hard to do - because - frankly - there is not enough disclosure as what is in the "one-off" bucket. So I do it with respect to only one merger - the Medicis Merger. That was the subject of Part III.

Comments on Part III

In Part III I assessed the restructuring charges with respect to the Medicis merger and whether they were plausibly one-off. I thought they were too large relative to both the employment base and balance sheet of Medicis to be plausible one-off charges. This leads me to the Wizard-of-Oz style conclusion but other people (see the debate in the comments) were willing to accept those restructuring charges as truly one-off.

I want to go through the issues raised both privately and in the public comments. Alas there are lots of deep-dives into difficult disclosures. I am going to try to make this as painless for both me and you as possible.

I stand by my conclusion though that is likely that one-off expenses are being dumped into the restructuring charges - and I show with a clear example of royalties paid to Galderma on an ongoing product (Sculptra). 

Employee numbers at Medicis prior to the acquisition

One of the more damming allegations in the last post was that Valeant provided for employee termination costs payable to approximately 750 employees of the Company and Medicis who have been or will be terminated as a result of the Medicis acquisition. I noted that the last form 10-K of Medicis had 646 employees.

Several people asked whether the 646 employees was before or after Medicis merged with Graceway. Medicis purchased Graceway at a bankruptcy auction and the closed the deal as per 2 December 2011. So that number provided in 2012 should have included the Graceway personnel (about 200 I gather). There is some doubt as to whether it did include the Graceway personnel. The last 10-Q of Medicis talks about 770 employees not including R&D functions. There may have been 900 employees so firing 750 is - I guess - theoretically possible albeit extremely aggressive. Just working through the numbers it is likely that more than 100 of those fired were in sales - and many of the products were out of patent (which means competition). Losing the employee who visits the doctors office (when the competitor is doing so) is probably negative for sales - but that is the subject of future posts.

The breakdown of acquisition costs in the 2013 form 10-K

There is a breakdown in the 2013 Form 10-K of the integration costs related to the Medicis acquisition. I quote:

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