BNL Finance has gone on the record saying that there is tremendous value in VRX stock, but for Valeant Pharmaceuticals (NYSE:VRX) to realize that value, it must divest assets. Not even a month later, Valeant Pharmaceuticals announced that China’s Sanpower Group is buying its Dendreon unit for nearly $820 million in an all cash deal.
Importantly, no one figured that Valeant was trying to sell or could divest Dendreon for such a massive premium. Valeant bought Dendreon out of bankruptcy a couple years back for $400 million. The significant depreciation in VRX stock since led us to conclude that if Valeant is going to create shareholder value, it must realize the value of its assets have diminished with VRX stock.
However, this move sends a strong message to the market and VRX stock owners that Valeant will and can make profitable deals for its business, regardless of how much VRX stock has fallen.
What Dendreon sale means for VRX stock
Dendreon’s Provenge was no more than 5% of Valeant’s annual sales. Yet, Valeant just sold the asset at a premium that’s more than 16% of its current market capitalization. This illustrates that there is in fact value in Valeant’s assets and that acquires will pay a premium regardless of the company’s valuation. Furthermore, this move eliminates pressure on the company to divest its more valuable businesses, like Salix, for pennies on the dollar to what it paid.
Finally, and most importantly, this move illustrates that VRX stock is in fact undervalued. Back in our 2017 outlook piece for Valeant Pharmaceuticals we explained that there’s no question Valeant stock is a value investment. However, we questioned whether the company would realize the need to divest assets, even at a loss to pay off debt.
Turns out, we were being short sighted. Valeant does not need to take a loss. It does not need to rid itself of assets when it can pay debt with cash on hand and annual free cash flow. Instead, Valeant should do what it did with Dendreon, seek acquirers for its assets at a fair value, and there is no question that over time VRX stock will double many times over.
This is in fact a great day for Valeant stock owners, a day that answered many of our biggest questions. I have no doubt VRX stock will respond accordingly.