Believe it or not, Valeant Pharmaceuticals (NYSE:BHC) is on a roll. Shares of the beleaguered drugmaker are up over 30% in the last month. Most of those gains stemmed from Valeant reporting a profit in the first quarter and raising its full-year 2017 guidance. However, the stock also received a nice bump on news that Valeant is selling its iNova Pharmaceuticals business.
What does this latest asset sale mean for Valeant's investors? And, perhaps more importantly, what does it not mean?
What it means
Let's look at the details of the transaction. Valeant is selling iNova for $930 million in cash. The company plans to use all of the money to pay down debt. That's good for investors for two key reasons.
First, Valeant really needs to reduce its debt load. As of March 31, 2017, the drugmaker had long-term debt totaling nearly $28.9 billion. Of the $2.1 billion in revenue generated in the first quarter, $474 million went to paying interest on that debt. Valeant spent nearly five times the amount it invested in research and development on interest. That's not a good place for any company to be, especially a pharmaceutical company that lives and dies on its R&D.
Second, the sale of iNova shows that Valeant CEO Joe Papa is living up to his word. Papa committed in August 2016 to reducing the company's debt by $5 billion by February 2018. He said that he would accomplish this reduction primarily by selling non-core assets, particularly those outside the U.S. and Canadian markets.
Prior to the iNova news, Valeant had announced divestiture transactions with total proceeds of $2.7 billion. Adding the anticipated cash from selling iNova should put the company in a good position to achieve Papa's goal. Although some hoped that iNova could fetch around $1 billion, the $930 million price tag isn't bad. Valeant bought iNova in 2011 for $657 million up front plus potential milestone payments of nearly $60 million.
Valeant's progress on asset sales to reduce its debt gives some credibility to Papa. The CEO has also promised to complete the company's turnaround by 2018, followed by a period of transformation beginning in 2019 with Valeant balancing organic and inorganic growth.
What it doesn't mean
The sale of iNova doesn't have an immediate impact. Valeant expects the deal to close in the second half of this year. Unfortunately, it doesn't even have a big impact.
Valeant will still be saddled with a massive debt after all of its pending asset sales wrap up, including the sale of iNova. Papa's commitment to lower debt by $5 billion will only be a start. Granted, it's a good start, but much more is needed.
The company still has several assets that it could sell, including Egyptian drugmaker Amoun Pharmaceutical. There's no guarantee, though, that Valeant will be able to complete further sales at attractive prices.
The iNova transaction also does nothing to help Valeant with its other huge problem: making a profit. Valeant's first-quarter profitability was essentially a mirage. Without a one-time income tax benefit of $908 million, the company would have posted a sizable net loss.
Asset sales like the recently announced iNova deal are good. However, I don't think they're what investors really need to watch. Instead, my view is that the performance of Valeant's dermatology business and new products are much more important factors that will determine whether or not the company truly turns around as Joe Papa has promised.
I'd pay attention especially to Siliq. Valeant has played up the psoriasis drug's prospects and are pricing it attractively. I'm skeptical about how successful Siliq will be. If Valeant's launch of the drug goes well, I might be more likely to buy into Papa's proclamation that the company is "the turnaround opportunity of a lifetime."