Health

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.

Sprout investors have abandonment issues. 

Valeant spent about $1 billion last August to acquire Sprout, which makes the female libido pill Addyi. It was Valeant's last big buyout before a $30-billion-plus debt load and accounting troubles torpedoed further M&A. As a capstone to a years-long, $34 billion deal spree, Sprout is looking pretty shabby. Addyi sales have been awful, and researchers question its effectiveness. Now former Sprout investors say Valeant is botching the drug's launch and charging too much for it -- alleged neglect that may end up violating the companies' merger agreement. 

It's another sign Valeant's troubles are more than just PR and that its appetite for flawed acquisition targets is one source of those troubles. Shares fell nearly 8 percent on Monday -- though the fact that Valeant's soon-to-be ex-CEO Mike Pearson was subpoenaed to appear at a Congressional hearing may have contributed. 

Sickly Sprout
Valeant shares fell on the news that Sprout shareholders think it is failing to successfully sell the company's female libido pill.
Source: Bloomberg
Intraday times are displayed in ET.

The terms of the Sprout-Valeant deal dictate that Sprout investors get royalty payments based on Addyi sales if the drug does well. An investor group, in a letter sent on March 14, asked Valeant to prove it can fulfill  its obligations under the deal, which include spending $200 million on marketing and R&D for Addyi in 2016 and the first half of 2017 and employing 150 people to sell the drug. The investors also questioned Valeant's $800-a-month price tag for the drug, which they called "predatory." They said that price is double what market research suggests, making the drug unaffordable, as many insurers won't cover it. 

Valeant says it plans to comply with all of its obligations. 

Sprout investors may be opportunistically using Valeant's recent weakness to apply extra pressure for the company to up its investment in the drug or modify its strategy. But there's some reason for concern, beyond the fact that Sprout is reportedly cutting jobs. Valeant is in aggressive cost-cutting and debt-payback mode and recently slashed its 2016 revenue forecasts by more than $1 billion. It doesn't exactly have $200 million lying around to spend on Addyi -- particularly as it appears to have soured on the drug. As recently as January, Valeant projected Addyi could hit $100 million to $150 million in sales this year. Not anymore; Pearson said on March 15 that such levels were "certainly not" happening in 2016.

Valeant's aggressive approach to drug pricing generally means insurers are just looking for reasons to restrict patient access to its products. And getting Addyi is an obstacle course regardless of price. The FDA has safety concerns and rejected the drug twice before approving it last year; Addyi carries the agency's strongest type of warning label. Pricing the drug so high made it even easier for insurers and patients to say no. 

Addyi's poor performance is familiar territory for Valeant; Sprout is not its only troubled acquisition. The company has focused its acquisitions in large part on smaller and somewhat troubled companies. In the past, Valeant was able to make such marginal assets pay off with price hikes, aggressive cost-cutting, and the help of specialty pharmacies. But that model is reaching a limit.

Valeant's goodwill -- $17.3 billion as of its latest SEC filing -- is 164 percent of its current market cap. That's more than all but two other companies in the S&P 500 or S&P TSX composite index. Given how things currently look for the business, write-downs might be inevitable

Mount Goodwill
Valeant's long acquisition spree has created a huge amount of goodwill, and impairment charges may be forthcoming.

 The letter from Sprout's investors is a headache, and Addyi's poor performance helped contribute to the shocking magnitude of Valeant's recent forecast cut. But these are only symptoms of a broader malady.

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

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net