Valeant Needs More Than Minor Surgery
After nearly a year and a 90 percent stock-price drop, Valeant is finally admitting that selling its garage junk won't be enough to get back on firm financial footing. Some of the fine china might have to go, too.
The embattled specialty pharma firm has stubbornly insisted it would only sell "non-core" assets to pay down debt. CEO Joe Papa finally conceded Tuesday that Valeant would at least entertain offers for more important businesses, such as Bausch & Lomb and its gastrointestinal drugs.
It's about time.
Sure, the company could sell minor businesses at fire-sale prices that will barely impact its debt load. That would keep it on the path of seemingly bi-monthly guidance cuts and endless creditor negotiations. Better to more aggressively hack at its odd and disparate collection of businesses.
Valeant 2.0 wouldn't reflect former CEO Mike Pearson's vision of a motley conglomerate, where the asset mix almost didn't matter -- the important features were a decentralized structure, price hikes, cost cuts and a low tax rate. But now that Pearson is gone, there's no reason to hold on to that vision. Breaking up the conglomerate might give Valeant's new leadership time to figure out a different, actually sustainable path forward.
Papa has already admitted a turnaround will likely take years. Small, off-price asset sales won't give him that kind of time.
Given Valeant's distressed status and the sorts of assets it has collected, small sales will bring in petty cash that won't pay down debt quickly enough. For evidence, see the Bloomberg News report earlier Tuesday that Valeant is working with Morgan Stanley to sell its dermatology drug unit Obagi and dermatology device maker Solta.
The two businesses could fetch "as much as $500 million," according to the report. That says it all, really: The combined price of the two firms in 2013 was almost $670 million. Valeant, in other words, is assuming it will have to take a 20-plus percent discount. Even that might be optimistic.
Valeant's whole dermatology business, including Obagi and Solta, saw revenue fall 43 percent in the first quarter from a year ago. Sales of best-selling dermatology drug Jublia have plummeted 37 percent. The next-best-seller, Solodyn, is down 53 percent. None of this bodes well for a high sales price. And potential buyers likely believe that any price quoted might be lower in a few months, if the company gets more desperate.
In the unlikely event Valeant gets $500 million from these sales, that will still make only a tiny dent (a dentling?) in its $31.98 billion debt load. Other previously proposed sales won't do much more.
The fact that it's hawking businesses at a major discount highlights another issue: Valeant has yet to take an impairment charge on its massive $18.6 billion in goodwill, even as recent acquisitions such as Salix have struggled. Putting two firms acquired in 2013 on the block at a discount is an admission it overpaid for them, they have lost significant value, are a poor fit for the company, or all of the above. Solta and Obagi probably aren't alone in that. Valeant has more goodwill than any North American company with a market cap of less than $10 billion, and more debt, excluding financial firms.
Even the company's core assets might not fetch full price -- their poor performance in the latest quarter led Valeant to cut its full-year revenue guidance by $1 billion. But they likely haven't eroded in value quite as much as some of the more ancillary businesses. They also have a larger set of possible buyers. And they'll better help the company de-lever.
Valeant and its balance sheet need more than minor surgery, and Papa finally seems willing to consider it.
Correction: An earlier version of this story incorrectly said "Shire" instead of "Salix" when describing recent Valeant acquisitions that have struggled.
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