Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Nominally Quebecois specialty pharma company seeks CEO. Fixer-upper. Share price, board and business in shambles.

Some took the news that Valeant CEO Mike Pearson plans to step down as a sign the troubled pharmaceutical firm might break up under new leadership. But long-time Valeant investor -- now first-time Valeant board member -- Bill Ackman is apparently not a fan of the idea. Ackman reportedly stood on stage with Pearson and chairman Robert Ingram at Valeant's New Jersey offices on Monday as employees were told that any asset sales will be of the non-core variety. The trio emphasized a belief that the company's problems are reputational, not operational.

Still not true, Bill. A business model that no longer makes sense qualifies as an operational issue. The new CEO, whoever that might be, and the company's strategic choices going forward need to reflect that this is a substantial renovation job.

Ack, Man
Just bad PR? Valeant shares have fallen nearly 90% since peaking in August.
Source: Bloomberg

What exactly is Valeant's core anyway? After six years of breakneck acquisitions in which the company spent more than $30 billion acquiring more than 40 companies, Valeant is a strange hodgepodge of businesses that don't complement each other and were frequently acquired at a premium. There's Jublia, a toe-fungus drug for which pharmacy benefit managers don't want to pay. There's a cancer vaccine called Provenge, a commercial failure that drove the company that developed it to bankruptcy. There's an eye-care business, and there's the decades-old antidepressant Wellbutrin. Valeant only breaks out sales for its top 30 products, which made up 52 percent of its unaudited fourth quarter revenue.  

The performance of the company's leading drugs make clear both how scattered and troubled Valeant is. Its six best-selling drugs last quarter came in six different areas of medicine. Three came from relatively recent acquisitions. Pharmacy benefit managers are restricting patient access to two of those top products, Jublia and diabetes drug Glumetza. Jublia revenue fell nearly $40 million from the third quarter to the fourth; sales of the drug had been driven in part by the controversial specialty pharmacy Philidor. Glumetza might be next to drop off. Xifaxan, an irritable bowel disease drug the company hopes will be its first product to hit a billion in annual sales, is growing at a slower-than-expected rate. 

Wellbutrin's sales growth has been price-hike dependent, and there are cheaper generic alternatives. It will be hard to maintain growth now that Valeant has pledged to be more moderate on the price front. Troubles for these drugs and throughout the business prompted the company to cut its 2016 Ebitda forecasts by $1.5 billion last week.

Tough Times
Some of Valeant's top selling drugs are growing slowly, under threat, or even declining.
Source: Company presentation
This chart leaves out SofLens, a disposable contact lens and the company's fifth best selling product in the most recent quarter. It did $74 million in sales in the last quarter, down $15 million from the same period last year, the company sites F/X impact for some of the weakness.

It's hard to justify keeping all of this together. The company's patchwork nature wasn't as much of an issue when it could paper over the cracks and maintain momentum through acquisition, cutting costs, and aggressively raising prices. But Valeant's $30 billion in debt makes future buyouts unlikely; big price hikes are politically untenable; and the company has already cut R&D and other spending to the bone.

Run as a more conventional company -- which it will have to be -- Valeant is a potential money-loser, according to an analysis by Bloomberg Intelligence analyst Elizabeth Krutoholow. If you remove exceptionally high price hikes and assume the company actually spent money on R&D (Valeant's 3 percent R&D spending as a percentage of sales is the lowest among its peers), Valeant could have had a trailing 12-month $842 million adjusted net loss through the fourth quarter, instead of an adjusted net income of $527 million. That doesn't exactly bode well for Valeant's future in its current form. 

The company has some legitimately attractive assets. But Ackman's plot -- which involves selling a 10 to 20 percent stake in eye-care unit Bausch & Lomb while maintaining control -- doesn't seem like the way to go. Why weigh Bausch & Lomb down with Valeant's toxic ownership instead of finding its price on the open market? Valeant's guilt-by-association effect has driven down the share prices of its specialty pharma peers; the effect will likely be even worse for something Valeant actually owns.  

There's also that $30 billion debt load. Investors have gotten increasingly anxious about Valeant's ability to pay that back. Selling only "non-core" assets won't make much of a dent.

And just selling off little chunks of the business to reduce leverage avoids reckoning with the fact that Valeant is management consultancy gone amok -- a failing experiment in financial engineering -- not a logically built pharmaceutical business with a PR problem. That needs to change, starting with the company's newest board member.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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