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By Carl O'Donnell
NEW YORK, April 19 (Reuters) - As Valeant Pharmaceuticals (NYSE:VRX)
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, analysts and
investment bankers said.
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 (NYSE:GS) and Centerview to assist with potential
divestitures, and provide other strategic guidance, Reuters
reported on Thursday.
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 did not immediately respond to requests for comment.
In December, Valeant's outgoing Chief Executive, Michael
Pearson (LON:PSON), said the company's debt was about was $6 billion higher
than desirable for the long-term, based on earnings figures at
the time.
Last month, the company sharply cut its 2016 earnings
forecasts. It also pared back its ambitions for near-term debt
reduction.
Meanwhile, 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.
TROPHY ASSETS
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.
"These products are more likely to perform better if they
were in the hands of other companies," said David Amsellem, an
analyst at Piper Jaffray who had downgraded Valeant to an
"underweight" rating in March.
Although tempting, Valeant would probably do best to avoid
unloading its worst performers, like female libido drug Addyi,
which could force it to suffer a writedown on its balance sheet
and further depress its stock, according to one of the
investment bankers.
Valeant bought Addyi for $1 billion shortly after it was
approved for the U.S. market in 2015, but it has since struggled
to gain traction among doctors and patients.
In recent weeks, the task of curbing Valeant's debt has
become increasingly urgent as downgrades in its credit rating
and ongoing negotiations with creditors threaten to raise the
company's cost of capital.
Last week, Standard & Poor's cut its corporate credit rating
on Valeant to 'B' from 'B+' and its secured debt rating to 'BB-'
from 'BB'.
Valeant has recently settled with some of its lenders after
a missed deadline for filing its 10-K annual report put the
company at risk of a default. It has secured an extension until
May 31, but has pledged to file its statements toward the end of
this month.