Valeant Pharmaceuticals' (VRX) increasingly precarious $31 billion debt stack is leaving the troubled Canadian drugmaker with few exit strategies other than to sell assets, and quickly, analysts say.
After slashing earnings guidance for 2016 in an earnings call this month with analysts, for the second time this year, analysts are growing concerned Valeant could breach covenants on its $1.6 billion bonds coming due in 2018.
"Our viewpoint is, based on the current financial guidance, they are up against the wall if they come in below the low range of adjusted EBITDA," Dr. Raghuram Selvaraju, an analyst with Rodman & Renshaw, said in a Thursday phone interview with Real Money. (EBITDA is a standard valuation metric that stands for earnings before interest, taxes, depreciation and amortization.)
In April, creditors of the 2018 tranche, after negotiating a fee, relaxed Valeant's obligations to maintain an interest-coverage rate of 2.75x from 3x to avoid technical default. The covenant is governed by a ratio of Valeant's trailing 12-month EBITDA over its interest expenses over the period.
But, according to Selvaraju, Valeant's slashed EBITDA forecast for the rest of the year of $4.8 billion to $4.95 billion, down from previous guidance of $5.6 billion to $5.8 billion, is adding pressure to sell assets, especially as revised EBITDA figures already assume some asset sales, he added.
"Based on the forward guidance, they are very close to breaching those covenants," he said. "Some assets are underperforming, and they should be gotten rid of now while Valeant can still get a decent price for them."
Earlier this month, Valeant also reduced its 2016 revenue to $9.9 billion to $10.1 billion from $11 billion to $11.2 billion, largely citing problems with its dermatology business, which has been exacerbated by Valeant's recent partnership with Walgreens (WBA), in which low prices at the retailer have often been clocking in below Valeant's costs. (Walgreens is in Jim Cramer's Action Alerts PLUS charitable trust.)
The other central problems in Valeant's business have been a dirsruption in the salesforce of its Salix business, as well as lower sales expectations from Nitropress and Isuprel, "which will suffer from pricing pressures," according to CIBC analyst Prakash Gowd.
Gowd reduced his price target on Valeant stock to $16 from $24 earlier this month, citing mispriced prescriptions from Walgreens outlets, as well as expected hikes to Valeant's debt-EBITDA and interest-coverage ratio. CBIC forecasts Valeant will end 2016 with a debt-EBITDA rate of 6.1x, undercutting Valeant's target of staying belox 6x, and will need to pay down about $1.75 billion in debt this year, and another $2.25 billion next year.
"We still believe Valeant will need to sell off assets in order to pay down debt," Gowd said in a recent report, primarily because of the decline of the drugmaker's EBITDA, which is the chief ingredient in driving much-needed free cash flow.
Meanwhile, Real Money's Cramer aslo said in a Tuesday CNBC appearance that Valeant is under increasing pressure to sell the businesses so it can to shore up cash because of its "precarious debt position" and "competition ready to tear them apart."
"They're kind of stuck with this bizarre agglomeration of businesses without any growth," Cramer added.
Shares of Valeant are down more than 90% from their highs last summer, following SEC and congressional probes into its revenue bookkeeping tied to a former partnership with mail-order pharmacy Philidor, and allegations of hiking prices to exorbitant levels.
Valeant shares were down 5% in midday trading Thursday.
