Investors seemed to be snapping up as many shares of Valeant Pharmaceuticals (VRX) as possible before Tuesday's closing bell, following reports that the debt-laden drugmaker might soon be shoring up billions in much-needed cash.
Valeant, which is saddled with about $31 billion of debt, appears to be nearing the sale of its Salix businesses -- which control Valeant's key stomach drug, Xifaxan -- for about $10 billion to Japan's Takeda Pharmaceutical, Dow Jones said in a report published within an hour of the closing bell. The news promptly sent Valeant shares into a roughly 26% surge to $23.55 before the market closed, adding to a total gain of 32% on the day.
"The close watchers tell you it's all about this drug, but otherwise the company has been a black box," Citron Research's Andrew Left said in a Tuesday phone interview of the Xifaxan treatment.
Shares of the Canadian drugmaker, which is slated to roll out earnings next week, were up earlier in the day after investors appeared to spot a discount after shares had fallen about 19% over the past two trading days, driven down by concerns over industrywide pricing cuts Friday and news on Monday that federal prosecutors have targeted Valeant's former CEO and ex-CFO in a probe over accounting fraud.
But the real problem for Valeant, which the $10 billion cash infusion would go a long way in curing, is that Valeant needs to shore up cash to cope with its debt load, and may not be able to afford matching discounted prices across the industry, as Real Money's Jim Cramer noted in a Tuesday report,
"What I have said over and over again is that what might be a big deal is if prices for big drugs of Valeant aren't holding up and at the same time the company can't sell any assets so that it has problems with cash flow," Cramer said in the report.
Free cash flow has never been more important for Valeant, especially with its debt and as the already-precarious leverage position continues to worsen, climbing to nearly 7x, based on total debt to EBITDA in Valeant's most recent quarter. (EBITDA is a standard valuation metric standing for earnings before interest, taxes, depreciation and amortization.)
Pressure has only mounted following Mylan's (MYL) recent scandal surrounding price hikes on its anti-allergy EpiPen medication; McKesson's (MCK) Friday earnings call, in which management noted Big Pharma pricing pressure is squeezing the distributor's bottom line; and a presidential election in which Hillary Clinton has vowed to "go after" Valeant specifically for "gouging" patients through "predatory pricing."