Finally, the shareholders of Valeant Pharmaceuticals (NYSE:BHC) have a genuine reason to cheer about the company.
As announced early Tuesday morning, Valeant is selling some $2.1 billion worth of its assets to help pay down the more than $30 billion in debt it ended with in the third quarter. Assuming both deals close as planned, and Valeant continues to shuffle a good chunk of its earnings before interest, taxes, depreciation, and amortization (EBITDA) toward debt reduction, the company may be able to push its debt levels down near $27 billion to $27.5 billion by mid-2017.
The asset sales Valeant announced were to two separate buyers. Both, however, were pure genius based on the price Valeant was able to get for the products it's divesting.
Valeant negotiated a great deal on these assets
The first deal saw Valeant sell three of its well-known medicated skincare brands -- CerAve, AcneFree, and Ambi -- to L'Oreal, for an aggregate of $1.3 billion. For L'Oreal, the move will bolster its U.S.-based medicated skincare brand presence and allow the company to more effectively go head to head with rival Nestle. Furthermore, as the best-selling category within the cosmetics industry, medicated skincare products could help form a foundation of growth (pardon the pun) for L'Oreal.
What was really impressive for Valeant was that it essentially had the upper hand on pricing in this deal. The three brands have annual combined sales of about $168 million, according to Bloomberg, meaning Valeant wound up netting about 7.7 times annual sales. Considering that CEO Joseph Papa was targeting about 11 times EBITDA on the sale of non-core assets, I'd guesstimate that's about what he and his management team were able to squeeze out of this sale.
The second transaction saw Valeant dispose of its Dendreon assets, acquired in 2015 shortly after Dendreon filed for bankruptcy protection.
The only Food and Drug Administration-approved asset in Dendreon's portfolio is Provenge, a cancer immunotherapy designed to treat advanced prostate cancer. Once believed to be a drug capable of $4 billion or more in annual sales, Provenge has struggled to reach even 10% of that potential. The emergence of competing prostate-cancer therapies simply pushed Provenge out of sight, especially with its more than $90,000 cost for a three-treatment course.
For instance, Medivation (NASDAQ:MDVN) and Astellas Pharma (NASDAQOTH:ALPMY) brought Xtandi to market about two years after Provenge. However, Xtandi was cheaper on an annual basis than Provenge, yet provided comparable, if not arguably better, clinical results. In the first-line PREVAIL study, Xtandi reduced the risk of death by 29% and radiographic progression by 83%, while delaying the median time advanced prostate-cancer patients had to begin chemotherapy by 17 months relative to the placebo. Xtandi is getting a lot of looks in first- and second-line advanced prostate cancer among physicians, with Provenge mostly an afterthought as a second-line treatment.
Despite this, Valeant managed to net an $819.9 million sale price to Chinese company Sanpower, which is well over the $445 million Valeant paid for Dendreon's assets last year, and probably about three times the current annual sales of Provenge. Once again, this was a great deal for Valeant.
Keeping the big picture in mind
However, in spite of Valeant finally making a modest dent in its debt -- assuming these deals close as expected -- there are still far too many concerns for investors to consider buying into a possible Valeant turnaround.
Consider, for one, that Valeant has been trying to sell a number of its assets for months without much, if any, success. It had been in talks with Takeda Pharmaceuticals (NASDAQOTH:TKPYY) to sell its Salix Pharmaceuticals assets for about $10 billion, which would have represented about a $1 billion discount to what it paid for Salix in 2015. Discussions broke down, though, because Takeda couldn't stomach Valeant's asking price for its core asset.
By a similar token, iNova Pharmaceuticals has been on the auction block with a $1 billion-plus price tag for months without any supposed takers. While patience has paid off for Valeant in its two latest divestments, it's still dealing with an uphill battle where it likely has minimal negotiating power.
Secondly, disposing of Dendreon and three skincare brands doesn't make much of a dent in Valeant's EBITDA-to-interest coverage ratio, which has plummeted as sales from its flagship businesses have sunk. At the beginning of 2016, Valeant's secured debt holders had debt covenants in place requiring the company to earn 3.5 times (or more) in EBITDA than it was paying to service the interest costs on its debt. A ratio lower than this would trigger a covenant default and the potential for an acceleration of its debt repayments.
Thankfully for Valeant, it was able to rework its covenants twice in 2016, albeit it came with added fees and a higher interest rate. Even with these assets being disposed of, Valeant's EBITDA-to-interest coverage ratio is probably still around 2.7-to-1, which is worryingly low. It's not low enough to violate the debt covenants from its secured lenders, but it's not high enough to assuage liquidity fears from Wall Street and investors.
There's also the issue that, while Valeant is divesting assets, it hasn't exactly dealt with its growth concerns. The company's flagship dermatology sales have been cut by roughly half, and Valeant's new drug distribution deal with Walgreens Boots Alliance hasn't been profitable thus far. It's going to be very difficult for Valeant to turn things around when the vast majority of its pharmaceutical portfolio is comprised of older drugs reliant on price increases to grow sales. Not to mention, Valeant's pricing practices are under the watchful eye of consumers and lawmakers.
I don't mean to belittle Valeant's clear step in the right direction, but the company has quite a few additional issues to address before it's worthy of consideration as an investment.