If Valeant manages in the next few days to offload the Salix Pharmaceuticals business it bought 18 months ago it will give one of the starkest comparisons of current takeover valuations versus where they stood near the peak of the biopharma bubble.
While bankers are still sounding out the market for bidders, the rumoured $8.5bn offered by Takeda could see Valeant getting only 55% of what it paid for Salix in 2015. Then again, by how much Valeant overpaid is of no interest to either the group or its investors, and an $8.5bn cash injection could be just what the doctor ordered.
This is because Valeant now has bigger fish to fry; before rumours of a Salix sale emerged in the Wall Street Journal and prompted yesterday’s 34% surge, the group’s shares were 90% below their price around the Salix buyout. Valeant’s number-one priority is to pay down some of its $31bn debt pile.
Most pressing in this is $6.2bn of revolving credit, senior debt and term loan that mature between April 2018 and December 2019. Clearly, $8.5bn of cash would give Valeant peace of mind until 2020, when various other senior notes mature, as well as strengthening its negotiating hand in debt refinancing.
Analysts today were quick to distance themselves from the $15.5bn Valeant had paid to outbid Endo and snare Salix (Valeant’s vanity ends Endo’s endeavour to sally Salix, March 17, 2015).
Evercore ISI wrote that in 2015 Valeant “clearly overpaid”, while Stifel analysts said they “never believed Valeant to be the best owner” given its lack of GI expertise. Stifel welcomed a Salix sale, highlighting the chance to pay down debt and give Valeant’s new chief executive, Joe Papa, fresh credibility.
But there remains an important consideration for a buyer today. Does Takeda – or indeed any other buyer, if one emerges – still risk overpaying, even if the cash up front only comes to $8.5bn? Maybe.
On the face of it $8.5bn would represent a fair amount based on NPVs of Salix’s key products – by far the most important of which is the irritable bowel syndrome drug Xifaxan. However, this valuation is derived from sellside consensus, which represent a blue-sky scenario; moreover, a buyer in what is effectively a fire sale should expect a significant discount.
Evercore said that on a multiples basis $8.5bn looked generous, stating that the resulting 10-12x Ebitda would represent more than what the market was assigning to Salix as part of Valeant. It should also be stressed that at this point it can only be assumed that Salix’s debt will remain with Valeant.
|An NPV valuation for Salix|
|Drug||2022 sales ($m)*||NPV ($m)*|
|Salix business combined||9,055|
|Note: *derived from sellside consensus, as compiled by EvaluatePharma.|
Just as well, then, that Valeant’s bankers seem to have received interest from Takeda. Attracting more bidders could result in a higher price still, but it is doubtful whether anyone could outbid a Japanese player known to pay handsomely for a US presence.
Endo would be unlikely to re-enter the fray given that price hikes are no longer a reliable speciality business strategy, and the days when no one worried too much about the consequences of gearing up balance sheets with cheap debt are gone.
Allergan had reportedly been interested in buying Salix back in 2014, when speciality pharma groups were falling over themselves to acquire. But with remarkable timing it today opted for a $10bn stock buyback and dividend policy in preference to splashing out on M&A, as well as missing earnings forecasts and cutting guidance.
Clearly the speciality pharma business is not what it used to be – witness Valeant’s stock crash and switch from an acquirer to a seller, and the reported criminal probes against its former chief exec and finance chief.
Salix too has had its problems, including reimbursement hurdles and admitted channel stuffing, which had inflated its top line. Mr Papa recently placed Salix in Valeant’s “growth” division as part of a separation into three units designed, presumably, to attract acquirers.
Even if he has now found interest for just part of this new division he should take the money and run.