The news that Valeant Pharmaceuticals is in talks to sell a core piece of its business, a unit called Salix Pharmaceuticals, has been met with a raised eyebrows all around Wall Street.
Wells Fargo’s David Maris described it as “selling the stove to keep the restaurant.” Valeant purchased Salix for $11 billion and took on $4 billion of its debt last year.
Both the Wall Street Journal and Bloomberg reported that the sale price could be about $10 billion.
Salix, which makes drugs to treat stomach problems, is a big driver of the Valeant’s revenue — Maris thinks it generates $1.4 billion to $1.7 billion — and with over $30 billion in debt and drugs facing generic competition, the Street thinks Valeant needs that income to survive.
More from Maris:
Overall, buying Salix for $13.1 billion and divesting it for $8.5 billion does not seem like a good business transaction to us.
If we assume the business being sold represents approximately $1.4 billion to $1.7 billion in revenue and assuming an approximate 25% COGS, 15% SG&A, and 15% tax rate, and assuming that the $8.5 billion in cash proceeds is used to pay off debt with an average interest rate of approximately 4.25%, we estimate that the sale of Salix would result in negative EPS impact of approximately $1.50-1.80. Without the exact figures from VRX, this must be considered a very rough estimate.
A few more perspectives:
- Mizuho’s Irina Koffler: “Salix sales resolves nothing,” she wrote. Like Maris, she’s concerned about the
- BTIG’s Timothy Chiang: He expects the company cut forecasts despite the sale.
Ever since Valeant started its disastrous 90% stock plunge last year, executives and board members have said that the company would not sell core assets. That basically includes Salix and Bausch and Lomb, which the company bought back in 2013. What this looks like, according to a lot of people on the Street, is desperation.
More from Maris:
If VRX were to sell Salix, we believe VRX’s growth profile would be significantly reduced as the company would be more levered to its neuro/other products portfolio, which is expected to decline by 20% per year through 2018, and its dermatology franchise, which appears to us to also be in decline, based on current prescription and sales trends.
This situation is especially dire if, as Chiang pointed out in his note, the company isn’t able to raise drug prices as much as it has historically. The government is watching drug price increases carefully, and the public is outraged about the situation, so doing so would be a landmine.
There was a knee-jerk reaction to reports of the potential sale on Tuesday: Valeant’s shares jumped 30%. On Wednesday the stock was down as much as 10%.