After losing roughly 95% of its value, how much worse can things get for VRX stock? For many Valeant Pharmaceuticals Intl Inc (NYSE:VRX) investors, the question has merit. However, we urge investors to completely ignore Valeant stock price. Instead, look solely at the business, and figure what exactly its worth. Upon doing so, we arrive with three essential takeaways.
- Valeant Pharmaceuticals has a large sum of debt at $30.4 billion, but it is manageable and can be paid over time. In the third quarter, Valeant’s net debt, or total debt minus cash & equivalents, was nearly $500 million less than the three months prior.
- Valeant’s sum of parts are valuable. Valeant Pharmaceuticals bought Salix Pharmaceuticals a couple years back for $15 billion. It is a gastrointestinal leader and was one of the better performing biotech stocks before Valeant acquired it. Furthermore, Valeant’s ownership of Salix includes Santarus, a fast-growing biotech that Salix acquired before it was combined with Valeant Pharmaceuticals. The Salix unit is less than 20% of Valeant’s total revenue, but worth twice of Valeant’s market capitalization.
- The legal exposure is unknown. There are three components: Philidor fraud, Allergan insider trading, and countless lawsuits. These things could cost Valeant several billion dollars over time.
While Valeant Pharmaceuticals can afford its debt and interest payments, the company has not allocated funds to account for unknown legal exposure. It’s that unknown which keeps Valeant stock in the dumps, with investors fearing that bankruptcy is a possibility.
We do not believe that bankruptcy is likely. However, Valeant Pharmaceuticals did make the mistake of paying back 3x more debt than it had to in 2016. The company should have just paid what was required, and save money for the unknown.
More importantly, all reliable sources have reported that Valeant has been in active discussions with acquirers for various assets. This includes Salix and its Australian drug unit, iNova.
Valeant needs to divest Salix unit
According to a report from the WSJ back in November, Valeant was in talks to sell its Salix unit for $10 billion. Shortly after, Takeda was named the acquirer, but reportedly talks fell apart with a $9.3 billion offer on the table.
If you are a VRX stock owner, it should piss you off if a deal really fell apart. Seriously, what kind of bargaining power does Valeant think it has with a market cap just over $5 billion? A $9 billion asset sale, even $8 billion for the Salix unit would have set VRX stock free.
That’s where we stand for 2017. Will Valeant Pharmaceuticals dispose of and divest assets? If the company wants to kill the negative stigma, and create liquidity to pay off debt and handle unknown legal expenses, it needs to divest Salix.
In other words, if Valeant will divest large assets, then VRX stock will rise big time in 2017. If not, Valeant stock will likely be dead money. Fact is, without balance sheet improvements, VRX stock isn’t going anywhere. And major improvements don’t happen overnight. That is unless Valeant gets a quick $7 to $9 billion from an asset sale.