With Valeant's third quarter showing no light at the end of the tunnel and illuminating a huge debt pile looming, a drastic solution to its problems could now be on the table: the company could be broken up and its individual business units sold off.
After all, things are looking dire despite Valeant's transparent new look, and new appointments and promises to invest in R&D were not enough to disguise a poor third quarter and the spectre of even tougher times to come. The group's new finance chief, Paul Herendeen, essentially admitted that anything was now up for grabs at the right price (see table below).
But, because of Valeant’s previous practices, more transparency might well be needed for any potential buyers to be able to value these assets. The company’s third-quarter statement was essentially a picture of a business in decline, with sales and earnings worse than expected and, apparently, weakening cash generation.
For a company in desperate need of funds to pay down debts, the fear surely is that it might have to accept rock-bottom asset prices to be able to continue to do so.
Valeant, which had already reduced its full-year 2016 guidance in today's early-morning press release, then said during a conference call that revenues and earnings were due to fall again in 2017, sending its stock down as much as 27% in early morning trading.
It blamed the expected shortfall on incoming generic competition in its neurology business, but some analysts questioned whether this was the only explanation.
Valeant has $30bn of debt, and has committed to using most of its free cashflow to repay this. The sale of non-core assets should also help – although other, bigger units could now also be on the table, as demonstrated by reports that the gastrointestinal business Salix was on the auction block (Speciality pharma biz for sale; one careful owner, November 2, 2016).
Valeant's chief executive, Joseph Papa, declined to comment on the potential sale of the Salix unit during the earnings call. The company’s other core businesses are dermatology, eyecare and consumer, he said.
|Looking for value? Valeant's top 10 products by NPV|
|Product||Today's NPV ($m)|
While Valeant would prefer to keep hold of these units it will not do so at all costs, according to Mr Herendeen, who said the group would consider offers with a fair valuation. However, he added: “We do not need to sell assets to be OK from a liquidity perspective.”
Of course, this mess is entirely Valeant’s making, or at least its former management team, some members of which are said to be under criminal investigation. After indulging in years of debt-fuelled acquisitions the company today has a balance sheet so onerous that fears of covenant breach are never far away.
Further blotting its copy book has been evidence of price gouging, with the company indulging in some of the biggest price hikes across the industry. All of which comes on top of years of opaque financial reporting that made any insightful assessment of the company’s profitability nigh-on impossible.
Of course investors were on board with all of this while the stock price was climbing, acquisitions were boosting the top line and banks were lining up to lend cash for the next big M&A deal. Now that the inside of Valeant has been revealed to resemble a house of cards, it is all coming tumbling down.