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.

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Valeant Pharmaceuticals International Inc. has made some not-terrible business moves in the past few months.

The troubled pharma firm has divested assets, raising cash to pay down debt. It has avoided big, public scandals over its accounting. It hasn't filed for bankruptcy.

But Valeant is still saddled with falling sales and $28.2 billion in debt. Now it wants to borrow more money to pay down near-term loans and extend its corporate life for another few years -- its second such maneuver this year.

Loads of Debt
Valeant dramatically increased its debt in 2014 and 2015 as it made corporate acquisitions
Source: Bank of America Merrill Lynch index data

Valeant is selling $1 billion of senior secured notes due in 2025, with the goal of redeeming debt maturing in 2020. In other words, it's kicking the can down the road, giving itself a few more years to grow into its massive debt load.

The company is lucky and taking advantage of a frothy time in credit markets; bond buyers are still so desperate for any asset that provides any income at all that they're apparently willing to accept a 5.625 percent coupon on the new bonds, according to price chatter reported by Bloomberg News. 

But let's be clear: Valeant is still paying more than it would have back in 2015, when it sold $2 billion of unsecured bonds with a coupon of 5.375 percent. 

Expensive Debt
Valeant's borrowing costs have increased even as broader market rates fell
Source: Bank of America Merrill Lynch index data


While Valeant has made some steps to convince debt investors of its viability, it's an example of how too much debt can go very wrong. Yes, it may survive, but it's hard to see how it can thrive, especially considering its increasingly onerous debt-maintenance costs.

Valeant pays a blended coupon of 6.14 percent on its $28.2 billion of debt, equal to roughly $1.7 billion in interest payments per year, according to Bloomberg data.

If its overall borrowing costs were more in line with the market-implied rate of more than 7 percent, the company would have to pay more than $200 million more in annual interest. In other words, just a little increase in borrowing costs makes a big difference for such a leveraged corporation. 

It would be one thing if Valeant could grow its way out of the problem. But the opposite is happening. More than $3 billion worth of divestments helped clear out some of Valeant's near-term debt -- but the units Valeant has sold would have combined to generate more than $800 million in revenue this year , and some were among the few parts of Valeant that were growing.

What remains isn't especially healthy. Valeant's sales have declined year-over-year for the past five quarters. Sales may decline next year, as well, as older products face generic competition. The company's gut drug Xifaxan is a lone bright spot, but its growth has been driven by unsustainable price hikes. 

Bailing Drinking Water
Valeant's sales continue to slide, and divestitures won't help
Source: Bloomberg

Valeant says it's done divesting for now, so whatever cash it does generate will largely go toward reducing its still-mountainous pile of debt. After that, debt service, and a full roster of legal issues, the company will struggle to find funds to invest in its business.

Valeant has skimped on R&D for years, and it has been shut out of the acquisition market by its past profligacy. As a result, its roster of potential future growth products is dangerously bare.

Skimping
Valeant is an R&D outlier even among other relatively parsimonious specialty/generic pharma firms
Source: Bloomberg

Unless the company can substantially increase cash flows, delaying its debt reckoning won't matter. 

The downward spiral of Valeant's business has led to an upward spiral in the cost of its debt. The drug maker is taking advantage of the market's renewed optimism in its management team and an intensifying hunt for yield. But that doesn't remove fundamental doubts about its long-term prospects.  

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

  1. The chart below only shows Valeant's bonds included in the Bank of America Merrill Lynch U.S. High Yield index.

  2. According to revenue estimates provided by Valeant and run-rates calculated by Gadfly. 

To contact the authors of this story:
Max Nisen in New York at mnisen@bloomberg.net
Lisa Abramowicz in New York at labramowicz@bloomberg.net

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