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Valeant Response to Anonymous Seeking Alpha Article from 21 January 2016

January 25, 2016

1. The author’s allegations regarding the improper capitalization of operating expenses are incorrect.

  • Per our most recent 10-Q, the account is titled “Prepaid Expenses and Other Current Assets” and includes more than just prepaid expenses.
  • Other current assets as of 9/30/15 include restricted cash, marketable securities, assets held for disposal, royalties receivable, certain deferred tax assets, and other receivables.
  • Prepaid expenses include prepaid advertising, insurance, taxes, licenses, fees (such as FDA establishment fees) and rent.  The account also includes credits against future distribution services fees that are due from customers.  For example, prepaid advertising includes the advance purchase of media which is typically done at least one quarter in advance in order to receive the most favorable rates, and expensed when the media airs, typically in the subsequent quarter.  Insurance, taxes, licenses fees are generally paid annually and amortized over the course of the period to which they relate.
  • The balance in this account is expected to decrease in Q4 15 and Q1 16 (for example media purchases for the Xifaxan IBS-D commercial which began airing and will be expensed in Q4).

2. The allegation regarding Valeant’s post acquisition accounting for Salix’s Allowance for Product Returns and Rebates is false.  In Q3, Valeant recorded measurement period adjustments in the amount of $178.4M.  As described in the Q3 10-Q, these adjustments related to the following:

  • The measurement period adjustments primarily reflect: (i) a reduction in  acquired in-process research and development  (“IPR&D”) assets, specifically for the Oral Relistor® program based mainly on revised cost projections (see further discussion of IPR&D programs in (f) below), (ii) an increase in assumed contingent consideration resulting from further assessment of assumptions related to the probability-weighted cash flows and (iii) the tax impact of pre-tax measurement period adjustments as well as reclassifications of certain tax balances. The measurement period adjustments were made to reflect facts and circumstances existing as of the acquisition date, and did not result from intervening events subsequent to the acquisition date. These adjustments did not have a significant impact on the Company’s previously reported consolidated financial statements and, therefore, the Company has not retrospectively adjusted those financial statements.
  • There were no measurement period adjustments or changes in the opening balance sheet amounts for rebates and returns. Valeant did update the disclosure in footnote g of the Salix business combination disclosure in the Q3 10-Q reflect the inclusion of $123M in gross to net balances that had previously been reported within other accrued liabilities accounts (amount reported in Q2 10-Q was $251).
  • In addition, the author’s allegation regarding the treatment of measurement period adjustments is incorrect.
  • In September 2015, the FASB issued ASU 2015-16 which is intended to simplify the accounting for measurement period adjustments.  The guidance is effective starting in 2016, however Valeant plans to early adopt the guidance, as permitted, in Q4 2015.  The guidance requires an acquirer to recognize adjustments to provisional amounts that are identified in the measurement period in the reporting period in which the adjustment amounts are determined.  The acquirer would record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of a change in the provisional balance sheet amounts, calculated as if the accounting had been completed as of the acquisition date.  The new guidance eliminates the requirement for the acquirer to retrospectively adjust previously reported financial statements to reflect these measurement period adjustments.  Measurement period adjustments related to items such as intangible assets would have an effect on earnings to be reported under this new guidance since there is subsequent amortization expense that would be impacted.  Conversely, measurement period adjustments to items such as allowances for returns/rebates would not have an effect on earnings to be reported under this new guidance as there is no immediate/automatic subsequent P&L impact like there is with amortization expense.

3. “Valeant’s Free Cash Flow seems to be far less than Cash Net Income”

  • Valeant provides a detailed cash flow statement as well as a supplemental adjusted cash flow from operations table in its press release which provide readers of the financial statements with details of the differences between Adjusted (Non-GAAP) Earnings and Cash Flow.

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