As Valeant Pharmaceuticals considers a multibillion-dollar auction to pare down $30 billion in debt, its challenge will be choosing which assets to sell without compromising any of its key businesses.
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Investors have lost confidence in the drugmaker's ability to grow profits after its pricing and distribution practices came under investigation by Congress and by federal prosecutors.
Its market capitalization has plunged to $11 billion from nearly $90 billion, raising questions about how it can shoulder its substantial debt.
Key shareholders, including activist investor William Ackman, who joined Valeant's board last month, are trying to shore up its finances. The drugmaker is working with investment banks Goldman Sachs and Centerview to assist with potential divestitures, and provide other strategic guidance, Reuters reported.
In the process, Valeant will need to ensure that it doesn't forfeit too much cash flow in selling key assets, which could leave its existing debt burden harder to bear.
As a result, the company is more likely to part with a handful of coveted drugs, possibly including gastrointestinal antibiotic Xifaxan, than carve out a major division for sale, according to analysts and investment bankers interviewed by Reuters.
Other assets that could go on the block include skin care products under its Obagi, Cerave and Solta brand lines, as well as toe fungus treatment Jublia, they said.
The company wants to stop short of selling off core divisions, such as Bausch + Lomb, Salix, and Medicis, that are fundamental to Valeant's strategy, they said.
Valeant has set an April 29 deadline to file its financial statements after missing a March deadline and satisfy the terms of its loans. It is also searching for a new CEO to replace Pearson.
A sale of eye care division Bausch + Lomb, one of Valeant's trophy assets, could fetch as much as $20 billion and go a long way toward paying off debt, according to an analysis by Annabel Samimy, an equity analyst at Stifel.
But B&L remains one of the company's most-profitable businesses, potentially delivering earnings before interest, tax, depreciation and amortization (EBITDA) of $1.6 billion in 2016, according to Umer Raffat, an analyst at Evercore ISI. Valeant's overall EBITDA guidance for 2016 the next four quarters is $6 billion.
Giving up cash flow to retire debt "is kind of circular," said one Valeant investor, and could ultimately force the drugmaker to sell significantly more than $6 billion to reach its long-term debt goals. The investor spoke on condition of anonymity because he was not authorized to speak to media.
Several other assets have strong potential for cash flow growth, allowing them to command a high valuation relative to their earnings, according to several investment bankers who spoke on condition of anonymity because they were not authorized to discuss individual companies.
Antibiotic drug Xifaxan is expected to see revenues grow to as much as $1 billion in 2016, a substantial uptick based on fourth-quarter sales of $210 million.
The treatment accounts for about half of the revenues of Valeant's Salix division, and could be worth upwards of $4.5 billion in a sale, according to some analyst estimates.
Other assets, like Jublia, could fare better under different ownership that has better ties to payers. ■