Will Ebiefung

About the Author Will Ebiefung

Will Ebiefung studied finance and accounting at the University of Tennesee. He works as a freelance investment analyst focusing on equities with market caps below $100 million. In addition to writing, Will is a full-time investor focusing on web properties and debt-based securities.

Valeant Pharmaceuticals Intl Inc: The Problem with Branded Rx

The closing of the $820 million divestiture of Dendreon to Sanpower Group boosts Valeant Pharmaceuticals Intl Inc (NYSE:VRX) liquidity position, but it does nothing to address the company’s real problems: lack of growth and deteriorating revenue.

The stock may see some temporary gains from positive headlines, but unless the core problems are addressed, these gains will probably disappear over the long term.

Valeant has divested quality assets from its two most stable segments.

Bausch & Lomb has lost several high-growth OTC products to L’Oreal, and there are rumors of a possible surgical asset sale to Carl Zeiss. Branded Rx has lost Dendreon. And the Salix division doesn’t look likely to make up for these loses.

The Dendreon Sale Is Not Impressive

Valeant’s Branded Rx (home of Salix, Dendreon, and Dermatology) is a long way from stabilizing, and the Dendreon sale is not a catalyst for long-term upside in Valeant’s stock because it doesn’t drive growth.

Granted, it is good that Valeant’s near-term debt maturities are under control. But in 2020 and onwards the company’s debt burden will be heavy. And if Valeant wants to survive through those times, it will probably need to grow EBITDA – something that is hard to do when divesting growth assets.

Valeant included revenue from Dendron in its first quarter earnings report where it was noted that the business grew revenue from $72m to $81m quarter over quarter.

Not only was Dendreon the best performing business in Valeant’s Branded Rx but it was actually the only part of the segment that managed to grow. Now it’s gone, and Branded Rx may deteriorate faster than it has already been deteriorating.

Valeant has also recently divested iNova, a high-growth Australian subsidiary that generated around $250 million in annual revenue.

Valeant’s Salix Growth Drivers Are Not Convincing

With Dendreon gone, Valeant’s Branded Rx may be in trouble, and the future of the segment will depend on Salix – which will depend on its pipeline.

However, the Salix pipeline depends on Xifaxin (rifaximin) instead of new, groundbreaking assets. Xifaxin is one of Valeant’s most prized assets, and it is not unreasonable to assume it will continue a positive growth trajectory. However, it is not a new growth driver.

It is not unusual for companies to continue developing their older drugs for new indications – this is as much a strategy to maintain current sales figures as to grow them.

In Valeant case, the Salix pipeline is made – in large part – by new indications for an old drug. These new indications/formulations will extend Xifaxin’s patent protection until 2022-2029 – but the drug will also lose several patents by that time.

And if sales from the new patents don’t make up for lost revenue from the expired patents, this isn’t really a growth driver.

On top of this, SAN-300 wasn’t developed by Valeant, and there is little evidence that Valeant has the level of drug discovery capability that would allow it to independently create new blockbuster drugs and move away from its old business model as an acquisitive platform company.

Conclusion

Valeant’s divestiture of Dendreon will help the company’s liquidity but it won’t change the fundamental problem with the stock: top line deterioration and lack of drug discovery capability.

Valeant’s Branded Rx division will look much worse in the coming quarters due to the lack of convincing growth drivers coupled with the divestiture of quality assets. Salix is the best hope for Branded Rx, but the Salix pipeline is based off extending the life of Xifaxin patents instead of drug discovery.

 

  • rick

    L’Oreal was sold at 18+ EBITDA which would value VRX as a whole at $40+ per share
    Dendreon was a high sales as you mentioned 81 mln in Q! but it was a lower margin area than other Branded Rx. And could be some channel stuffing since they new sales was coming and wanted to book those revenues while they still owned the assed.
    INova to me was worst one but there are some good points to be made for the sale:
    1 it was an international brand and those fetch a lower premium than US brands.
    2 B&L’s own products were sold by iNova, those revenues and profits will continue after the sale.
    3 Simplified managements operations significantly.
    4 they already have distribution channels in place across asia as 60% market share in lenses in china and over 30% in india

    Overall I see these divestitures as highly positive allowing management to invest and focus on core competencies and operations while lowering interest payments and converting those dollars to more productive line items.

  • rick

    Will I like and agree with all your points but there are many positives that you are not bringing to light to be fully balanced.

    For surgical unit we still have no idea what the multiple might be, we will need to wait to see if its excellent like L’Oreal or poor as iNova “appeared” to be.