After more than 90% of Valeant Pharmaceutical's (VRX) market cap vanished following last summer's highs, all eyes are now on how much the struggling drugmaker could fetch by selling assets to cope with its $31 billion debt stack.
Bill Ackman, the billionaire activist who recently took a seat on Valeant's board, recently said the company has no plan to sell core, so-called "crown jewel" assets, notably eye-care giant Bausch & Lomb.
But as Valeant's troubles persist -- following the delay of its 10-K filing with the SEC amid probes into its accounting practices and drug pricing -- analysts with Wells Fargo Securities are looking into the potential of a Bausch & Lomb sale, and are saying its value has dropped substantially since Valeant scooped it up in 2013 for $8.7 billion.
A Wells Fargo Securities analyst team led by David Maris said Wednesday that selling Bausch & Lomb will not shore up the amount of much-need free cash that Valeant would expect. (Wells Fargo Securities maintains an Underperform rating on Valeant, despite an Overweight rating on the specialty pharma industry.)
The problem? Bausch & Lomb has failed to grow under Valeant's leadership, Maris said, highlighting that it raked in more than $3 billion in sales in 2012, based on its S-1 filing with the SEC, and yet Valeant is touting $3.5 billion in total annual sales for Bausch & Lomb combined with its skin-care businesses and other over-the-counter products -- a sign Wells Fargo Securities interprets as waning Bausch & Lomb revenue.
"In addition, we believe assuming a sale in the $7 billion to $8 billion range, Valeant may still be at risk of violating debt covenants in 2017," Maris added.
In April, creditors of this 2018 tranche managed to negotiate a fee with Valeant, which 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 in the period. (EBITDA is a standard valuation metric that stands for earnings before interest, taxes, depreciation and amortization.)
But Valeant is hardly in the clear, Rodman & Renshaw analyst Raghuram Selvaraju said in an interview earlier this month, noting Valeant is "up against the wall if they come in below the low range of adjusted EBITDA."
Valeant shares are down 92% since their highs last August, following SEC and congressional probes into Valeant's revenue bookkeeping tied to a former partnership with mail-order pharmacy Philidor. Valeant's shares were also pressured by allegations of price hikes -- notably characterized as "price gouging" by Democratic presidential candidate Hillary Clinton -- which culminated in an April Senate special-committee hearing, and the replacement of Valeant's CEO and several board members.