Valeant says it may sell the family jewels to survive, and stock is soaring (VRX)
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Valeant is selling the family jewels to survive now.
Valeant Pharmaceuticals is in talks to sell its Salix unit to Japan's Takeda for $10 billion, according to the Wall Street Journal. The stock is up around 30% on the news.
The crown jewel of Salix's product line is Xifaxan, a drug that cures irritable bowel system.
When the company bought Salix it told investors that Xifaxan would be a $1 billion drug in 2016. So far though, that hasn't been in case.
Takeda, for its part told Business Insider: "Regarding your inquiry, while we are always evaluating opportunities, we don’t comment on industry rumors."
Valeant, we should note, is $30 billion in debt. And its stock is down over 90% since its peak last year before accusations from a short seller combined with government scrutiny over its pricing practices to bring the stock crashing down. In the past company executives and top investors have said they would not sell top assets like Xifaxan.
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The deal
Valeant acquired Salix for $11 billion in 2015 and took on around $4 billion of its debt, so the company would be taking a loss here.
In December of last year, Valeant projected that the drug would generate $390 million in Q4. Sales were light by $180 million, hauling in only $207 million in revenue.
The company's transition to dealing with Walgreen's haven't helped matters. On the company's June earnings call, one Valeant executive mentioned that the bumpy transition was affecting the company's crown jewel, Xifaxan.
Executives also blamed poor performance on "disruption workforce turnover changes in leadership" (the head of Xifaxan's division left Valeant earlier this year) and "enrollment in high-deductible plans." On that latter point, it just seems patients don't think this $1 billion irritable bowel syndrome drug is worth their co-pay.
A Xifaxan generic is set to hit the market in 2017 or 2018. From Wells Fargo:
Hopefully with 3Q results Valeant will update us with what the expected patent expires are for 2016-2017, as well as update the market with what the current expectations are for generic versions of Xifaxan. Teva indicated it anticipates 30 month stay expirations in 2018 for the following Valeant brands: Acanya, MoviPrep, Relistor, Solodyn, andXifaxan.
All these realities have Wall Streets saying that if Takeda pays this price, it's paying 8-10x EBITDA for Salix.
From Ummer Raffat over at Evercore ISI:
Based on our math, a sale price of $8.5-10B is likely 10-12x EBITDA - which is reads better than what market is assigning to this business within Valeant currently. More importantly, if this sale materializes, it takes care of 2 issues: (i) whether Valeant can sell assets for >10x EBITDA; (ii) that Xifaxan TRx have stalled and patent litigation is a long-term overhang.
And lest we forget, Salix is being investigated by the U.S. Attorney’s Office for the Southern District of New York for a number of its products.
From Valeant's 2015 10Q, filed on July 28th:
On February 1, 2013, Salix received a subpoena from the U.S. Attorney’s Office for the Southern District of New York requesting documents regarding sales and promotional practices for its Xifaxan®, Relistor® and Apriso® products. Salix and the Company are continuing to respond to the subpoena and are cooperating fully with the subpoena and related government investigation.
So these negotiations could get interesting.