What would a Salix sale do for Valeant?

Dive Brief:

  • Valeant Pharmaceuticals shares spiked sharply higher Tuesday after The Wall Street Journal reported the Canadian drugmaker is in discussions to sell its Salix stomach-drug portfolio to Japan's Takeda for as much as $10 billion. The report also noted that another buyer could be interested. 
  • "We are currently in discussions with third parties for various divestitures including but not limited to Salix," Valeant said in a statement on the report Tuesday. 
  • Under former CEO Michael Pearson, Valeant had paid a little over $11 billion to acquire Salix last spring. But a year of accounting scandals, pricing controversies, federal investigations, leadership changes and a near-default have put the drugmaker in a bind, staring at roughly $31 billion in total debt. 

Dive Insight:

Another new report sourced to "people familiar with the matter." Another major stock swing for the embattled drugmaker. Only this time Valeant stock surged over 30% rather than falling, a rare move upwards on news the company is shopping its stomach-drug business. 

A sale of the Salix portfolio for the $10 billion cited in reports would go a long way to addressing Valeant's looming debt problems. Although new CEO Joseph Papa has been able to negotiate debt restructurings which have given Valeant some near-term breathing room, nearly $4.4 billion in debt will come due in 2018, according to the most recent quarterly report. And interest expenses have jumped, adding up to over $470 million in the second quarter. 

Yet, selling Salix would strip out one of Valeant's most attractive and best-selling assets, the irritable-bowel syndrome treatment Xifaxan (rifaximin). Although the drug has performed worse than expected this year — partly due to sales force turmoil — it still brought in $200 million in Q2 sales, more than any other drug in Valeant's portfolio. 

All told, sales of Xifaxan and other Salix drugs annualize to around $1.4 billion in revenue, according to a note from Evercore ISI analyst Umer Raffat. An August presentation from Valeant on second-quarter earnings suggested the Salix portfolio accounts for roughly 14% of overall revenues, a significant chunk of a company struggling to find a path to growth without heavy drug price increases.

Without Xifaxan, Valeant would be left with the generic antidepressant Wellbutrin, a contact lens product and the troubled cancer drug Provenge as its top sellers.

Previously, Papa and Valeant had been focused on divesting non-core assets, indicating in that same August presentation that the company was evaluating "strategic alternatives" for a number of non-core businesses representing a total transaction value of around $8 billion. It is unclear what effect a Salix sale would have on those plans. 

A Salix sale would remove about half of the drugs Valeant tagged as part of its new "Branded Rx" business segment, which was meant to generate around 30% of Valeant revenues. 

If the stock jump Tuesday was any indication, Valeant's new plans bolster the company's near-term viability. Given the crippling debt overhang, such a move is probably necessary to bring interest payments and long-term debt down to more manageable levels. Generating excitement about the company's growth prospects without Salix could be even harder still.

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Filed Under: Mergers and Acquisitions / Deals Corporate News
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