Needing cash, Valeant in talks to sell stomach-drug unit in $10 billion deal; hedge-fund icon Bill Ackman finally has a good day

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Valeant Pharmaceuticals International Inc. (Laval Quebec) is in advanced talks to sell a big stomach-drug business to Japan’s Takeda Pharmaceutical Co. for about $10 billion, a move seen easing pressure on Valeant over its heavy debt load, according to The Wall Street Journal.

@Valeant in talks to sell Salix to Japan’s @TakedaPharma for about $10 billion Click To Tweet

The companies could reach a deal for Salix Pharmaceuticals Ltd., which Valeant bought just a year-and-a-half ago for roughly $11 billion, in the coming weeks, people familiar with the matter said. The purchase price would include about $8.5 billion in cash and future royalty payments to Valeant, the people said.

There is no guarantee the companies will reach a deal and, indeed, there is another unnamed potential bidder in the mix, the people said.

Valeant confirmed the discussions late Tuesday, saying, “We are currently in discussions with third parties for various divestitures including but not limited to Salix. The discussions may or may not lead to a definitive agreement.”

Valeant shares jumped after The Wall Street Journal reported on the potential deal, rising 34% to close at $23.86. On Wednesday, Takeda said it was in discussions with many parties about potential deals to accelerate growth, but declined to comment directly on the Journal report.

Should Valeant consummate a deal, it would allow the company to largely pay back its bank lenders, removing a big area of concern for investors ever since the drugmaker became embroiled in an accounting scandal last year. Valeant has told investors it would work to reduce its debt load, but the company was expected to do so through a series of smaller steps.

It would also likely allow Valeant’s new chief executiveJoseph Papa, to focus on rebuilding Valeant’s core franchises in skin and eye drugs, which have been struggling.

If it sells Salix, Valeant’s top-selling products would be an off-patent antidepressant named Wellbutrin and Bausch & Lomb’s SofLens daily disposable contact lenses. The company would be expected to redouble emphasis on its skin and eye drugs, such as some acne treatments and over-the-counter vitamins taken for eye health. Valeant also has high hopes for a psoriasis treatment, brodalumab, which is up for regulatory approval.

Salix makes treatments for stomach disorders like traveler’s diarrhea and irritable bowel syndrome, or IBS.

For Takeda, the purchase would come after it lost out on earlier attempts to buy Salix and deliver big-selling gastrointestinal drugs it has been seeking to bolster its lineup of stomach remedies. At the time of Valeant’s Salix deal, the Canadian drug company was riding high on a strategy of acquiring companies and consolidating their research-and-development budgets.

But then Valeant’s business tactics and accounting came under intense scrutiny, leading to government investigations and the departure of its CEO, Michael Pearson, and other executives.

Valeant’s highflying stock plunged on fears it wouldn’t be able to keep up its prior pace of acquisition-led growth and that its $30 billion of debt was too much. Investors have been particularly focused on the roughly $12 billion Valeant owes banks, given that the vast majority of its $19 billion in public bonds don’t start coming due before 2020. Valeant took on roughly half its current debt load to pay for Salix after it won a heated bidding war for the company.

Selling Salix for less than it paid in April 2015 could afford Valeant a loss it could use to offset gains from other asset sales.

Takeda plunged in with an offer to start the talks. Takeda, Japan’s largest drugmaker by revenue, vied for Salix in the previous auction, and combined on an abortive offer for all of Valeant with private-equity TPG, The Wall Street Journal reported earlier this year.

Salix would give Takeda a drug for IBS called Xifaxan that Valeant had predicted could have $1 billion in sales this year. Sales haven’t done as well as some analysts expected, however. Many Salix sales representatives left the company, and Xifaxan has faced fierce competition from a competing drug, Viberzi, from Allergan. Meanwhile, Teva also is working on a generic version of Xifaxan.

Separately, on Monday, Oct. 31, Bloomberg reported that Valeant’s former chief executive Michael Pearson and ex-chief financial officer Howard Schiller are targets of a U.S. criminal probe against the drugmaker over its ties to specialty pharmacy Philidor that helped boost its sales. Schiller also served as interim CEO while Pearson was on medical leave, according to Reuters.

The report, citing people familiar with the matter, said the case against Valeant could yield charges within weeks, or lead to a settlement with the company. Valeant issued a statement saying it has been fully cooperating with authorities conducting the investigation.

Valeant used Philidor to overcome insurer reimbursement rejections of its medications, with Philidor resubmitting claims to insurers until they were approved, according to numerous media reports late last year. It has since severed ties with the pharmacy company.

Steve’s Take: Recently, when Valeant Pharmaceuticals and Herbalife are moving sharply in late trading, it means billionaire Bill Ackman is losing more money, says Forbes.

But on Tuesday afternoon, Ackman’s under-performing hedge fund Pershing Square Capital Management gained as its shares in embattled Valeant surged and a money-losing short trade against Herbalife moved closer to the black.

Later on Tuesday, The Wall Street Journal reported that Valeant is in advanced talks to sell its Salix business, a market leader in treatments for irritable bowel syndrome, to Takeda Pharmaceutical for about $8.5 billion in cash, in addition to royalty payments.

That report, which cited unnamed sources, sent Valeant’s shares surging over 30%, erasing sharp Monday losses after Bloomberg News reported that Federal prosecutors may seek criminal charges against the company’s former CEO, J Michael Pearson, and ex-CFO Howard Schiller.

Ackman also saw a glimmer of hope in his billion-dollar short bet against multi-level supplements seller Herbalife, which announced after the market closed that longtime CEO Michael O. Johnson will be stepping in June 2017 and assuming the role of executive chairman.

That disclosure, in addition to the company’s report of a 3% rise in third quarter sales and declining profits, sent Herbalife shares lower by nearly 2% in afterhours trading. At a price of $58.20, Herbalife was changing hands at three-month lows.

Herbalife will appoint current COO Richard P. Goudis as CEO in June, and characterized the management change as part of a planned succession strategy. Goudis is set to don Herbalife’s mantle just after a deadline set by the Federal Trade Commission expires, which forces the company to restructure its compensation for distributors and alter its advertising for claims of a business opportunity.

“We would like to applaud Michael Johnson for doing a superb job navigating the company through a number of libelous attacks during this period. I am glad he intends to stay meaningfully involved in the company and I fully support the Board’s choice of Rich Goudis becoming CEO while Michael remains actively engaged as Executive Chairman,” said billionaire Carl Icahn, Herbalife’s largest shareholder.

For Pershing Square, the Valeant surge and Herbalife drop will be a relief. Since Ackman disclosed an over $3 billion position in Valeant in March 2015, its shares are off nearly 90%, while Herbalife has surged over 60%–exactly the opposite of his desired outcome.

Meanwhile, an Amsterdam-listed iteration of the hedge fund fixes its weekly performance every Tuesday evening. Last Tuesday the fund, Pershing Square Holdings, closed at a net asset value of $16.51 a share, down 21.2% year-to-date. Had Valeant remained near its Monday lows, or Herbalife surged on its earnings report, or both, Pershing Square might have disclosed some of its worst-ever performance numbers. And that follows a 2015 that was down 20%.

Pershing Square will likely remain extremely volatile as Valeant tries to revamp its operations under a new management and board after a 13-month crisis that evokes the accounting scandals of the early 2000s.

Meanwhile, Valeant’s legal troubles remain a hard-to-quantify risk for the company, which carries over $30 billion in debt. Herbalife is also no slam-dunk. The company is in the midst of working to comply with its FTC order, and Carl Icahn has repeatedly hinted at an unspecified tender offer. If Herbalife can easily meet the FTC’s new mandates, as the company claims, or get a takeover bid, it would guarantee heavy losses for Ackman.

So this week, there was some hope for Pershing Square and Ackman. But a complete recovery seems a long way off. In 2016, Pershing Square will add a non-cumulative high watermark option to its fund, in which investors will have the option of paying no performance fee on annual returns of up to 5%, and a 30% performance fee on gains above that threshold.

There are still plenty of opportunities for Valeant to reverse course and default back to freefall. Congressional investigations abound. With all the ensuing uncertainty, markets are likely to revert back to a wait-and-see mindset.

Steve's Take: I still calculate plenty of downside potential in @Valeant shares Click To Tweet

I still calculate plenty of downside potential in Valeant shares. Of course, timing is everything. It’s a classic example of the Sisyphean stock, where savvy, risk-adverse investors make money as the rock rolls up the hill, while also cashing in on a short position as the rock comes crashing back down. This week, Bill Ackman is probably feeling pretty good about that old myth.