Well, that didn’t take long. Just one day after the so-called “female Viagra” finally won Federal Drug Administration approval, acquisition-hungry Valeant Pharmaceuticals (VRX) bought Sprout, the company that developed the drug, for a cool billion — some to be paid now, and some to be paid early next year.
While acquisitions have become the new norm for Valeant Pharmaceuticals, owners of VRX stock may be getting weary of the seemingly higher progression of prices shelled out for these deals.
In fact, the 3% dip from VRX stock today tacitly suggests the perceived cost/benefit relationships of a recent swell of acquisitions has finally tipped toward the “cost” side of the scale.
In other words, frustrated owners of VRX stock may be not-so-rhetorically demanding an answer to one big question: What exactly is Valeant Pharmaceuticals getting for its $1 billion when it’s already got so much else going on?
Why Sprout Pharmaceuticals?
The drug in question is called flibanserin, though Sprout Pharmaceuticals will sell it under the trade name Addyi.
As was noted, it’s something of a Viagra for ladies, restoring libidos for women who suffer from what’s officially called hypoactive sexual desire disorder. Unlike Viagra or other erectile dysfunction drugs for men, though, flibanserin is taken daily.
The drug hasn’t been without its fair share of controversy.
Flibanserin, which has been rejected twice before by the FDA, can cause nausea and drowsiness. There are those who also claim the treatment isn’t even effective. Even this time around, the advisory panel to the FDA only recommended the approval of flibanserin by an underwhelming 18-to-6 vote.
It’s also the only drug under the Sprout Pharmaceutical umbrella, approved or in trials.
Despite the controversy, some observers believe there is a market for such a drug. Although the revenue outlooks are varied. A figure of $2 billion is a commonly touted number, though it’s unlikely Addyi would capture all of that market.
Even five years ago when the drug was up for approval (and ultimately rejected) Decision Resources analyst Alasdair Milton said annual sales of flibanserin would peak at $300 million. And that was before makers of other libido-enhancing drugs like Palatin Technologies (PTN) started to make headway in this new category of pharmaceuticals.
Nevertheless, even if Addyi only generates sales of $300 million per year, $1 billion isn’t a terrible price for Valeant Pharmaceuticals to pay. It’s a price that will, however, test the company’s and shareholders’ patience.
Valeant Pharmaceuticals Starting to Show Cracks
Sprout is just one of several acquisitions Valeant Pharmaceuticals has made of late, though each one seems a little more ill-advised than the last.
In April of this year, Valeant bought Salix Pharmaceuticals — a $14.5 billion deal that’s by far the biggest trophy of the year. The acquisition brought a dozen drugs currently-marketed drugs under the Valeant Pharmaceuticals umbrella, including recognizable names like Pepcid and Colazal. Still, with trailing twelve-month revenue of $1.8 billion at the time of the purchase, Salix didn’t come cheap, even with widened uses of Xifaxan and Relistor in the pipeline.
And there have been more deals in the meantime that are even more questionable.
Case(s) in point: In March, Valeant Pharmaceuticals bought the bankrupt maker of Provenge, Dendreon, for nearly half a billion dollars. Last month the company quietly spent $28 million to buy Unilens Vision (UVIC). Also last month, Valeant agreed to acquire Egyptian pharmaceutical company Amoun Pharmaceuticals.
At first glance, all the deal-making seems like forward progress. Veleant has proven itself as capable of buying companies and reducing costs as it moves ahead with their product lines. It’s an M.O. that’s slowly — almost imperceptibly — nickeling and diming the company to death.
As of the end of June, Valeant Pharmaceuticals was sitting on $3.0 billion worth of near-term accrued liabilities. It’s not an unmanageable figure, but for a company that’s only generated $8.2 billion in revenue for the past twelve months — and for a company only expected to bring in $10.7 to $11.1 billion — it’s not exactly chump change.
The real red flag on the balance sheet, however, is its long-term debt. Valeant now owes $30.3 billion in long-term liabilities, up nearly twice from the year-ago figure of $15.2 billion.
Most of that debt stems from the purchase of Salix, though it’s not as if Valeant has been stingy with other deals. It’s on pace to spend another $2 billion or so for the current quarter, the biggest purchase of which (so far) has been Sprout.
That’s a massive amount of debt for a company of this size.
And it’s not just more debt. The company has issued approximately 8.3 million shares of VRX stock over the course of the past year to help fund deals. That’s a 2.5% increase in the number of shares issued and outstanding.
Bottom Line for VRX Stock
Kudos to Valeant Pharmaceuticals for being willing to move decisively and quickly on a newly-approved drug. The company seems to be getting a bit sloppy with its ambitions, though; Addyi is an especially unproven venture.
Either way, whether it’s the Sprout acquisition or something else, one or more of these leveraged deals is going to come back to haunt VRX and its shareholders.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.