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.

Investors have cheered many of Valeant Pharmaceuticals International Inc.'s recent efforts to whittle down its debt by selling assets. Its latest sale doesn't deserve much celebration.

The struggling drugmaker is selling Addyi, a female libido treatment it bought for $1 billion in 2015, back to former shareholders of the company that developed it, Sprout Pharmaceuticals Inc. They get the drug and a $25 million loan from Valeant, which gets a 6 percent royalty on Addyi sales, which so far have not been meaningful. Perhaps more importantly, the deal ends a lawsuit by Sprout shareholders accusing Valeant of botching Addyi's launch and spending less than promised to market it. 

Setting that $1 billion on fire back in 2015 would have been more constructive for Valeant than buying Addyi; at least it would have generated warmth. The drug's unloading points to an ugly third-quarter earnings call for Valeant tomorrow. 

The Trek
Valeant's march to recovery continues at a glacial pace
Source: Bloomberg

The Sprout deal is a poster child for how prior management put Valeant in its current predicament. The company paid a high price for an uncertain asset with major safety issues. Addyi only made it past the FDA after multiple tries and a concerted lobbying campaign.

Low Return
Valeant's multi-billion-dollar debt-fueled M&A binge has not brought consistent revenue growth

Addyi's launch would have been difficult under any circumstances. But it coincided almost perfectly with a series of revelations about Valeant's specialty pharmacy ties and pricing practices that sent the company into a tailspin. Against that backdrop, Addyi was so unsuccessful that Valeant announced earlier this year it was starting over from scratch with a "re-launch" of the medicine. That re-launch has now apparently been called off.

Valeant has finally written down some of the mountain of assets it accumulated as part of its often poorly directed acquisition binge. There's more to come. In its most recent 10-Q, Valeant disclosed that the carrying value of Addyi intangible assets was $836 million, and the contingent consideration associated with it was $421 million. A material impairment charge seems hard to avoid; it may come as soon as tomorrow.  

Adjusting
Valeant is likely to take an impairment charge related to the sale of Addyi
Source: Bloomberg

Legal liability related to the Sprout shareholder lawsuit likely had something to do with the decision to ditch Addyi. Valeant doesn't need any more of that; the company is involved in a dizzying array of government investigations and lawsuits. This deal is not a standard legal settlement, but it does resolve a lawsuit at a cost to Valeant. It won't be the last time that happens.

There may be long-term cost benefits to the deal. The drug is arguably not worth investing in and Sprout shareholders insisted Valeant was contractually obligated to spend $200 million to market and sell Addyi. Valeant is now free of that. But the short term will be rough. Valeant was already going to have a difficult time meeting its full-year guidance after making aggressive assumptions about the sales of its older medicines and not fully accounting for the impact of other divestitures.

This embarrassing reckoning with past mistakes -- and its bookkeeping impact -- is unlikely to help. 

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