Valeant to keep Salix after Takeda deal blows up; it’s déjà vu all over again

Valeant Pharmaceuticals International Inc.’s (Laval Québec) talks to sell a stomach-drug business to Japan’s Takeda Pharmaceutical Co. (Osaka) for roughly $10 billion have broken down amid last-minute disagreements over price and other matters, according to people familiar with the matter.

@Valeant talks with @TakedaPharma over @SalixPharma broke down amid disagreements over price Click To Tweet

Though the talks could still be revived, Valeant is now focused on building the business, Salix Pharmaceuticals, rather than selling it, the people said. The development represents another setback for a company that has been plagued by an accounting scandal, the departure of its top executives and a plummeting share price, according to The Wall Street Journal.

As of Friday’s close, Valeant shares had fallen 85% over the past year.

Valeant is now moving ahead with plans to build the sales force for Salix’s crown jewel, the irritable-bowel drug Xifaxan. Valeant announced the “significant” expansion in a news release last week.

Valeant’s shares, which had already been sagging after last Tuesday’s (November 29, 2016) announcement, fell further after The Journal reported on the breakdown and closed the week down 9% at $15.45. One of the 11th-hour disputes was over the sum of an agreement, which Takeda sought to reduce, according to people familiar with the matter.

Takeda, a big Japanese drugmaker that has prioritized stomach drugs, previously had approached the beleaguered Canadian pharmaceutical company about purchasing Salix and the sides been near a deal that would have included $8.5 billion in cash plus royalty payments, the Journal had reported earlier in November. That report sent Valeant’s stock up 34%, but the gains have evaporated in recent weeks after a disappointing third quarter and another cut to its earnings guidance.

 Valeant is in the process of trying to sell several assets in its portfolio, which had been built largely through acquisitions, to pay down roughly $30 billion in debt. It is also exploring selling a surgical-equipment business that could fetch $2.5 billion, the Journal has reported.

Valeant has said it hadn’t intended to sell Salix, which it only bought last year and considers a core asset, but had to listen when a prospective bidder seemed willing to pay a good price.

Some people inside Valeant have argued against selling the unit because it is a potential source of significant sales growth, one of the people said. A sale would help Valeant pay off roughly $12 billion in bank debt, which is the most pressing concern for investors who fear a collapse in the company’s earnings could put its existence at risk. And a purchase would help Takeda boost its stomach-drugs franchise.

Takeda has sought several times to acquire Salix and Xifaxan, which Valeant had predicted could have $1 billion in sales this year. Takeda was a bidder for the company when Valeant won an auction for Salix in 2015, and earlier this year approached Valeant with a partner about buying the whole company.

Valeant hopes an expanded sales force will boost Xifaxan sales by targeting the primary-care doctors who often treat such conditions, the Journal has reported. But the company attributed its lower earnings guidance in part to the expense of increasing its sales force.

Steve’s Take:

“It’s like, déjà vu all over again.”

Many people think that baseball great Yogi Berra never would have said the word déjà vu, as it wasn’t his kind of language, says Retro Galaxy.com. But Yogi himself insisted that he said this in reference to home runs by teammates Roger Maris and Mickey Mantle, who often hit homers.

Well, pardon the obvious theft of this Yogi-ism, but it popped into my head as I was thinking, so much for Valeant’s $10 billion plan to sell its Salix business to Takeda. Talks have broken down at the last minute because of disagreements over price, among other things, The Wall Street Journal reports.

Yep, “It’s like, déjà vu all over again.”

Takeda, which has reportedly tried multiple times to snag Salix–first as a bidder in the auction Valeant eventually won, and earlier this year with an offer to buy the whole Valeant company–wanted to fork over a lower sum for the gastrointestinal business, the WSJ says.

The portfolio has underperformed lately, as have many of Valeant’s key drugs, compounding the problems of a company that’s already faced channel-stuffing allegations, a slew of investigations, political pricing pushback and debt-default worries from investors, points out FiercePharma.com.

(Nb; Channel stuffing is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public.)

The deal’s tanking will also erase a chance for Valeant to pay down a good portion of the M&A-fueled debt that’s been making investors squeamish. They didn’t take the news well, sending Valeant shares tumbling. While there’s still a chance talks could be restarted, Valeant reportedly has decided to move forward with plans to build Salix up on its own–and it’s already announced some of those plans to the public.

The company has “initiated a significant sales force expansion” to focus on potential primary care physician prescribers of IBS-D drug Xifaxan and opioid-induced constipation drug Relistor, it said in a statement last Tuesday.

“Xifaxan and Relistor are integral to our gastrointestinal franchise which remains a core asset for future growth potential in the hands of Valeant,” CEO Joseph Papa said in the statement.

Meanwhile, Valeant has plenty of other issues to deal with.

Reports suggest the company still is working to sell off other assets in moves that could ease its debt burden, including a surgical equipment business that could reap $2.5 billion.

And industry observers also are still wondering whether additional charges are forthcoming in a federal bribery case for Valeant or its former senior management; US authorities have already charged former Valeant exec Gary Tanner and Andrew Davenport, the former CEO of Valeant-linked specialty pharmacy Philidor, with contriving a multimillion-dollar fraud and kickback scheme.

I’ll leave with another famous quote that seems apropos of Valeant’s current laundry list of dicey, corporate imponderables: “It ain’t over ‘til it’s over.” This quote is undoubtedly the most well known Yogi-ism, says Retro Galaxy.com. It’s also one of the more coherent ones. He first said this about the 1973 National League pennant race.

Steve's Take: @Valeant must resolve regulatory headaches before they could become a good bet Click To Tweet

As far as Valeant’s future business prospects are concerned, the regulatory issues must be handled successfully before anyone in their right mind could consider the company a solid, long-term bet. But, as Yogi used to say… .

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Disclaimer: All posts are purely my opinion. I am not a financial advisor, so please conduct your own due diligence on any and all stocks mentioned.