Sure, Valeant needs to pare down its roughly $31 billion debt, but the question remains: What's Valeant really worth without Salix? And secondly, does the $10 billion that Dow Jones says Valeant might rake in by selling Salix to Japan's Takeda Pharmaceutical represent a fair value?
First of all, the beleaguered drugmaker would be far less diversified without key stomach drugs held in Salix's portfolio like Xifaxan. Valeant post-Salix would be far more reliant on its dermatology businesses (pitted against Action Alerts PLUS holding Allergan (AGN) ) and its Bausch & Lomb eye-care franchise (left to fend off giants such as Johnson & Johnson (JNJ) ).
Dermatology, supported largely by Valeant's Jublia medication, is "the most worrisome" of Valeant's businesses, and could even lead to a whiff on next week's earnings roll-out, Canaccord Genuity analyst Neil Maruoka said in a Tuesday investment note. (Canaccord maintains a Hold rating on Valeant and $33 price target vs. Valeant's midday trading price Wednesday of $22.12.)
"Valeant needs to find a buyer and Allergan has no urgency or need to do that, and can pick its spots," Action Alerts PLUS co-manager Jack Mohr said in a Wednesday interview. "Allergan is also more interested in developing through R&D than through M&A," he added, noting that Valeant is lagging in terms of capital for new investments.
Lackluster growth in Valeant's dermatology businesses could also indicate that Valeant may be having more trouble than expected in turning around its troubled partnership with Walgreens (WBA) , another Action Alerts PLUS holding. Valeant's CEO Joseph Papa noted in June that low drug pricing inherent in the poorly arranged partnership with Walgreens means "every time a prescription goes out the door, we're taping dollar bills to that prescription."
And the lopsided arrangement Valeant struck with Walgreens last year is largely the result of the company's nixed partnership with mail-order pharmacy Philidor last fall, prompting Valeant to look for alternative distributors, namely Walgreens. (The Philidor breakup came on the heels of allegations of accounting misconduct by the SEC -- over which Valeant has so far acknowledged $58 million of improperly booked sales -- and probes into the drugmaker's bookkeeping.)
Valeant has acknowledged that the Walgreens partnership has led to significantly higher costs of goods sold in the first half of the year, according to its latest quarterly SEC filing.
The weak growth has only compounded Valeant's need to shore up cash through asset sales, especially with newfound pressures not to breach loan covenants, governed by a ratio of Valeant's earnings to its interest obligations. "With the slower than forecasted recovery in our dermatology business and delayed acceleration of Salix revenues, we have limited headroom in complying with the interest coverage ratio maintenance covenant," Valeant noted in its second-quarter SEC filing.
In supporting Canaccord's expected $1.72 earnings per share for Valeant's earnings roll-out on Tuesday -- 5 cents below consensus estimates -- Maruoka said "pushback from insurers" may be making it more difficult for Valeant to get reimbursements in its already challenging deal with Walgreens.
And even if Valeant does pull in the $10 billion through a Salix sale to Takeda -- expected to come as $8.5 billion in cash and $1.5 billion in royalty agreements -- that's a far cry from the $15.8 billion analysts with BTIG estimate that Valeant paid in total for Salix in 2015. (By Valeant's own estimations in its 2015 annual filing with the SEC, the total fair value transferred for Salix was more than $13 billion.)
Source: Valeant 2015 SEC filing
All told, the lesson for Valeant investors could be: Years of debt-fueled acquisitions that have hinged on raising drug prices may have left Valeant in an unfavorable seat at the bargaining table.
The consensus 12-month price target among Valeant's listed analysts is $36. Veritas Research -- with a $20 price target on the bear side -- noted in a Tuesday report on chatter of a looming Salix sale, "While we do not know the exact terms or whether the sale will materialize, we know that VRX's business is deteriorating. Therefore, we maintain our intrinsic value and our recommendation."
On the more bullish side, BMO Capital Markets analyst Gary Nachman noted in a report, reaffirming the firm's Market Perform rating and $29 price target, "Selling Salix for about $10 billion would result in a significant loss on that deal, but considering the current environment and the annual sales run-rate for the GI business of about $1.5 billion, we believe that would be a solid outcome for Valeant."
In a Wednesday interview, Nachman added, "If they could get $10 billion for Salix then I think that could be a smart strategic move for them because that's probably the only way they can take a big chunk out of their debt load."
Nachman added that while more bidders interested in GI businesses might approach Valeant with more attractive buyout structures than the combination of cash and royalties Takeda has reportedly offered, it is unlikely any bidders will meaningfully top the $10 billion offer.
"I'll be honest, if they can get a deal for $10 billion, that's more than I thought they would get for that business," he said. "It would be a very full offer given what we know today."