True to his promise, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) CEO Joseph Papa continues to work toward his goal of reducing the drugmaker’s debt, announcing the impending sale of iNova unit this morning. The $930 million it will be receiving from the pair of private equity firms buying the business from Valeant will be used to pay off a small part of the organization’s $28.5 billion in long-term debt on the books as of the end of the first quarter.
The market applauded the move, sending VRX stock up 8.7% in Thursday’s early trading, offsetting a similarly-sized loss from the day before.
The question the market will soon be asking is, will the company’s asset-sale plan crimp its ability to drive revenue, and in turn drive much-needed profit?
As has been the case with Valeant Pharmaceuticals for a while now, it’s not clear if the plan does more harm than good.
VRX Stock: Details of the Deal
The iNova unit, which makes pain-relief and cold treatments (among other things) for OTC and prescription use, is to be acquired by Pacific Equity Partners and The Carlyle Group in an all-cash deal that’s expected to close before the end of the year.
Papa commented in the press release announcing the deal:
“The sale of iNova is part of the company’s ongoing efforts to both simplify our operating model and strengthen our balance sheet. We will continue to evaluate opportunities that will enable us to deliver on our commitments and unlock value for shareholders.”
The “strengthen our balance sheet” was arguably the heart and soul of the decision.
The saga of Valeant Pharmaceuticals has been thrilling to be sure. A relatively unknown name as recently as 2012, with some prodding by activist investor and hedge fund manager Bill Ackman, VRX stock rallied from $57 near the end of that year to a high near $263 in August of 2015.
The rally wasn’t built to last, however.
While the string of revenue-accretive acquisitions bolstered the top line, debt swelled to out-of-control levels, and it was only a matter of time before the business model — buying obscure drugs and then inflating their price — was finally brought to light and then called into question. VRX stock is now down nearly 90% from that late-2015 high, with its pricing power shattered and the company struggling to service the debt that funded all those acquisitions.
Now the company is aiming to sell some of those acquired business to pay back some of its debt.
In addition to iNova, in March it announced the sale of its skincare business to L’Oreal SA (ADR) (OTCMKTS:LRLCY), and in January it sold Dendreon to Sanpower for $820 million.
All told, Papas said late last year he wants to pay down $5 billion worth of debt by February of 2018. With the sale of iNova in the queue, the company is well down that path.
Not a Panacea for Valeant Pharmaceuticals
Not everyone is impressed by the sale of iNova, however. Case in point: Evercore analyst Umer Raffat thinks the deal will be debt-neutral. He explains, “The transaction simplifies the geographic footprint a bit for Valeant … but as I mentioned, its debt neutral (i.e., not de-levering).”
iNova generates roughly $200 million revenue per year, contributing $125 million in EBITDA for 2017.
For perspective, Valeant’s debt burden cost it about $474 million last quarter, and $1.83 billion in interest expenses for all of last year.
In that light, Raffat has a point — culling iNova also culls $125 million worth of annual EBITDA, but barely makes a dent in the company’s $28.5 billion mountain of debt; the $930 million will only offset its total debt by 3.2%, and reduce its annual interest expenses by roughly $58.5 million. iNova may have been contributing more to the GAAP bottom line than that, even after stripping out taxes, interest payments and depreciation from the $125 million worth of annual EBITDA it generates.
The same questions and concerns have been raised about its other recent divestitures as well.
Bottom Line for VRX Stock
In the sense that the sale of iNova simplifies the organization and allows management to focus on its top prospects, Thursday’s news may well help for the long haul. Valeant can’t shrink its way to success in perpetuity though. Sooner or later it’s going to have to grow its revenue and income using the pieces of itself it ultimately intends to keep, and that’s something we’ve not yet seen enough of.
VRX stock is up today, but there’s no real assurance shedding iNova for $930 million in cash is going to help on a net basis.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.