Valeant divests assets worth $2.1 billion to ease debt load; finally a smart move, but too little, too late?

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Valeant Pharmaceuticals International Inc. (Laval Quebec) is selling its Dendreon cancer treatment business and three skincare brands for $2.12 billion as the troubled Canadian drugmaker looks to reduce more than $30 billion in debt. Investors were unimpressed as Valeant’s US-listed shares closed the week up just 4 cents to $15.33.

@Valeant sold its @DendreonNews cancer treatment business and 3 skincare brands for $2.12 billion Click To Tweet

The company is trying to regain investor confidence after its stock plunged over the past year amid, among other missteps, disclosures that it worked secretly with a specialty pharmacy to lift sales of its products. Valeant also has been the subject of recent investigations by congressional panels as well as the Federal Trade Commission and the US Securities and Exchange Commission, says Reuters.

French cosmetics group L’Oreal is buying CeraVe, AcneFree and Ambi from Valeant for about $1.3 billion in cash. Valeant is also selling its Dendreon unit to China’s Sanpower Group Co. Ltd. for $819.9 million. Valeant had acquired the bankrupt Dendreon in 2015 for about $300 million.

“We think these two assets we sold today certainly go a long way toward helping us,” Valeant CEO Joseph Papa said in an interview on CNBC.

Valeant’s gastrointestinal, dermatology and eyecare businesses are core to the company’s operations, but it would listen to significant offers, Papa said.

The deals could be the first of a series of divestitures for Valeant, whose growth was founded on an acquisition spree that left it buried in debt. Mizuho Securities USA analyst Irina Koffler said she expects Valeant to divest its dental business, as well as its interests in some unspecified geographic areas.

Founded in 2005, CeraVe develops cleansers, moisturizers and baby products and is one of the fastest-growing active skincare brands in the United States, L’Oreal said. AcneFree provides acne treatments and skin cleansers, while Ambi makes products to treat dark spots and brighten skin.

L’Oreal said the three brands would stand alongside the likes of Vichy and La Roche-Posay in its Active Cosmetics division, which is among its strongest in terms of growth and resilience to slowdowns in consumer spending in the past three to four years.

Hoffler points out that L’Oreal paid nearly eight times the brands’ combined annual revenue of $168 million as it expands into one of the fastest-growing areas of the beauty industry.

Steve’s Take:

It’s taken some two years but Valeant has become another much-deserved cliché for pharmaceutical gluttony. Prior to last year’s disastrous congressional hearings and an accounting scandal, the generally inconspicuous drugmaker quietly bought companies and then increased prices on some medicines to the stratosphere. As the cash register kept ringing, and while R&D investment lagged, Wall Street cheered and share value soared to new heights.

That was then. More recently, Valeant has endured the commonly known reversal of circumstances, and I don’t mean the good kind. Its stock price has sunk, government investigations continue and a new management team has been hired. But cynicism abounds on Wall Street. Although offering discounts, for example, on a pair of heart drugs, used by hospital ERs, after jacking up prices to the rooftops in 2015, some hospitals are still waiting to see the discounts.

All of that being said, last week Valeant announced it was selling some $2.1 billion worth of non-core assets to help pay down the more than $30 billion in debt it ended up with in the third quarter. Of course this came after months of promises and rumors of asset sales that didn’t occur. Nevertheless, Valeant finally answered investor doubts and creditor worries and the price it got was better than most expected.

Arguably, these asset sales go a long way toward proving that the products and properties on Valeant’s balance sheet are of reasonable quality and worth more than the debt with which the company is saddled. In the case of both asset sales, Valeant is realizing a considerable profit.

Dendreon was purchased in February 2015 for $495 million, and is being sold for about $820 million. As for the assets sold to L’Oreal, it is estimated they cost Valeant a total of about $150 million in a combination of deals between 2008 and 2012. So the $1.3 billion price tag also represents a solid profit. In fact some analysts think L’Oreal actually overpaid considerably.

Still, the two sales probably reassure investors about Valeant’s near-term financial safety, says Max Nisen at Forbes. But he goes on to point out that the $2.1 billion Valeant will raise only represents a pittance compared with its $30 billion-plus debt load.

And the fact that the company’s share price didn’t budge last week didn’t alter the reality of an 80% massacre over the past year. The two asset sales don’t do much to change the harsh reality that assuming both deals close as planned, the company will only push its debt levels down near $27 billion by mid-2017.

On the brighter side, what can be said about these two transactions is that they confirm that assets on Valeant’s balance sheet exist and are real. And some observers say it was pure genius that the company was able to offload Dendreon at such a premium to its acquisition cost in 2015. Dendreon’s sole product is Provenge, a prostate-cancer vaccine that is virtually obsolete and expensive to produce.

And somehow Valeant was able to get the upper hand on pricing in its deal with L’Oreal. The three brands offloaded have an annual combined revenue of about $168 million, according to Bloomberg. This means Valeant wound up getting about 7.7 times annual sales. Not bad, considering that CEO Joseph Papa was targeting about 11 times EBITDA on the sale of non-core assets, according to JournalStar. It’s likely Valeant got the best possible deal that he and his management could’ve hoped for.

Bottom line:

Valeant finally achieved a relatively small, and frankly, unexceptional, reduction to its debt load. But assuming these deals close, there are a multitude of serious concerns for investors to contemplate before jumping on the turnaround bandwagon.

It’s worth noting that Valeant has been trying, without accomplishment, to sell certain assets for months. Take, for example, the aborted deal with Takeda Pharmaceuticals to sell its Salix Pharma unit for about $10 billion. Talks broke off because Takeda couldn’t justify Valeant’s asking price.

The two deals Valeant inked this week do establish that the debt on the company’s balance sheet represents real assets. Seeking Alpha thinks this is worth noting because,

“Everyone thinks Valeant has overpaid for everything it ever bought, and its debt is worth much more than the underlying assets. For some odd reason, even as management said again and again that it intends to reduce debt…no one seemed to believe them.”

That may be true. But such sentiment is likely due to the entire price-gouging problem that led Valeant to be singled out in congressional hearings about industry-wide greed and its subterfuge in responding to valid criticism.

Some analysts believe that Valeant’s rock-bottom stock price, and correspondingly low equity value, makes the company a strong acquisition target notwithstanding its debt load. In spite of its many challenges going forward, there is still fundamental value in the company’s remaining portfolio.

As other contributors have mentioned, there are several larger pharmaceutical companies with tons of cash where a Valeant buyout could make sense. Seeking Alpha includes Gilead, Pfizer and Amgen among the most likely suitors.

In the final analysis, although Valeant has divested some assets, it still hasn’t dealt with its growth struggles. To say the least, it’s going to be challenging for Valeant to execute a complete 180° turnaround when the propensity of its product offerings are older drugs needing healthy price increases to lift sales. This won’t be a slam dunk now that Congress and the public have a wary eye on its pricing practices.

Although finally offloading a couple of non-core assets may reassure some investors about its near-term survival, the deals merely afford Valeant “breathing room,” as Nisen aptly characterizes it. Its self-inflicted financial wounds require extremely challenging steps in order to turnaround and remedy the actual business. Failing this, the question is whether or not potential suitors see Valeant’s core assets as more valuable in their hands than as a distinct company.

Steve's Take: More needs to be done for @Valeant to lower its $30+ billion in debt Click To Tweet

It’s worth noting that this week’s divestitures will take another bite out of Valeant’s revenues, and even before their announcement, analysts already see 2017 as poorer than a dismal 2016. Justifiably, the prevailing sentiment about Valeant on Wall Street is cautious at best and fearful at worst. I’m reminded of Warren Buffett’s admonishment, however: “Be fearful when others are greedy and greedy when others are fearful.” Seems simple enough in this case.

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. See “about” page for more details.

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