Valeant's Possible Fire Sale Looks Worse Than Ever

It's an increasingly motivated seller whose best asset keeps getting uglier.

Holding an earnings call on the morning of the most contentious U.S. presidential election in recent memory signals it might contain news you want to fly under the radar. In that way, at least, Valeant's third-quarter report didn't disappoint.  

Many investors will focus on Valeant Pharmaceuticals International's ugly cut to full-year earnings and revenue guidance Tuesday morning (its third such cut in a year), its revelation that it expects revenue and Ebitda to decline in 2017, or its new CFO's revelation that there might be more "surprises" to come. Shares fell 23 percent.

But investors might want to pay more attention to what these results say about Salix, a gut-drug maker Valeant acquired for $13.4 billion last year, which is rumored to be on sale to help pay down some of the company's massive $31 billion debt load. 

Such Great Heights

Valeant followed one of its biggest one-day share-price increases -- on news of a possible Salix sale -- with one of its biggest-ever share-price declines, on its disastrous third-quarter earnings report

Source: Bloomberg

Selling Salix -- which Valeant declined to discuss specifically on the call -- was already less than ideal. After these results, it looks potentially both less lucrative and more necessary.

Valeant had a $1.22 billion net loss in the quarter. Of that, $1.05 billion came from a long-overdue goodwill impairment charge related to the declining value of its U.S. businesses -- including Salix, whose sales fell 5 percent in the quarter from a year ago. Valeant said it gave discounts on Xifaxan, Salix's flagship drug and Valeant's best-seller overall, so large they more than wiped out an increase in drug volume. And large amounts of inventory held by customers don't bode well for the unit's future sales.  

Valeant is already seen as a distressed seller and is rumored to be considering letting Salix go for around $10 billion, a major discount. These trends and Valeant's woeful quarter seem unlikely to increase the company's negotiating leverage or drive a bidding war. 

If Salix is disappointing, then other parts of Valeant's business outside of Bausch & Lomb are catastrophic. Excluding Salix, branded drug sales declined 36 percent from a year earlier, and sales of older treatments dropped by 16 percent.    

Bad and Worse

Outside of Salix and Bausch & Lomb -- both rumored to be up for sale in part or in whole -- Valeant's sales growth potential looks unappealing

Souce: Bloomberg

And things are about to get much uglier going forward for the company's "diversified" (read: old) products. 

The biggest product in the segment this quarter -- the anti-depressant Wellbutrin, more than a decade old -- saw sales decline 26 percent year-over-year. Valeant disclosed that Nitropress, the second-biggest drug in the segment this quarter, is expected to face generic competition late this year or early next. Competition for several other, smaller drugs is coming next year. 

Valeant already expects those losses to outweigh any growth its other units can hope to produce next year. If things continue to get worse and this guidance doesn't hold -- a real possibility, given pricing trends for the company's products and its recent execution -- Valeant may once again risk violating credit covenants. It's negotiated looser terms from creditors twice already. Doing so again will be more difficult and expensive. 

So the company is stuck between the rock of violating credit agreements and the hard place of being forced to sell one of its few attractive assets at a discount for survival cash, thereby likely consigning itself to a growth-free future. 

Neither option is appealing, and soon Valeant won't have the election to provide cover for bad news. 

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

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    Max Nisen in New York at

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    Mark Gongloff at

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