Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has begun the process of its own breakup, and for VRX stock holders, this might be one of the best conclusions they could’ve hoped for.
Its skin care line is going to L’Oreal SA (ADR) (OTCMKTS:LRLCY), and its equity interest in Dendreon — which produced prostate cancer treatment Provenge — is going to Sanpower Group.
Between them, the two deals represent more than $2.1 billion in cash for a company whose market cap has been pushed down to $5.1 billion. It’s not much for a company with debts of over $30 billion, as reported in September, but it’s the start for what could be a beautiful breakup.
The Philidor scandal, and the market failures that followed, have made VRX stock worth more dead than alive. The new moves are an indication its board realizes this and is willing to take actions necessary to get investors at least some return on their money.
Heading into Tuesday’s trade, VRX stock was up about 12% on the news. Still, now might be the time for speculative investors to get into Valeant, before those gains are fully realized.
What Can Valeant Sell?
Valeant still has some pieces worth buying, and reporters have been speculating on their value for months.
They start with Bausch + Lomb. The eye care company was bought for $8.7 billion in 2013, at a time when it was reportedly generating $3.3 billion in revenue. Valeant does not break down its units in financial reports, but the company should have about $4 billion in sales for 2016, and could be worth $20 billion in a sale, at 14 times its EBIDTA.
Salix, which was bought for $11.1 billion in 2015, is still part of the company after its sale to Takeda, a Japanese company, fell apart in November. The price on that deal was $10 billion, and if something like it could be resurrected then, combined with a Bausch + Lomb sale, the current debt can be retired.
What Valeant Will Have Left
VRX still would have pieces left that could, with a name change, be worth more than the current $5.1 billion market cap.
They would start with Wellbutrin. Biovail, the Canadian drug maker that became the heart of today’s Valeant in 2010, owns U.S. rights to Wellbutrin, acquired in 2009.
This is a 30-year old generic drug used for depression, but the old Valeant managed to triple its price and double its sales over the last few years. Such price hikes represented bad publicity last year, but in the new U.S. political environment, they may just be good business.
Beyond that there are other products under the Valeant umbrella, including Jublia for treatment of toenail fungus. Pricing is controversial, but taking such drugs out from under the Valeant umbrella could make them profitable, even if prices are cut.
Not a Fire Sale
Valeant needs to make some asset sales before 2018, when a big chunk of its debt comes due. But if it can do that — removing the pressure on the balance sheet — VRX has an excellent chance of being worth more than it currently is.
The market would undoubtedly reward the sale of Salix or Bausch & Lomb with a price bump on VRX stock, delivering a solid profit to speculators who get in now. The current company is valued by the stock market at barely half its annual sales, while rivals like Merck & Co. Inc. (NYSE:MRK) are routinely valued at over four times their annual revenue.
Your risk is that Valeant’s board tries for the last dollar, to please investors who are out of the money like Bill Ackman of Pershing Square Capital Management, who became the company’s largest shareholder while its scandal was unraveling.
But his loss could be your gain.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
