April 19, 2016 / 11:02 AM / a year ago

RPT-DEALTALK-Debt-laden Valeant faces tough choices in asset sales

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By Carl O'Donnell

NEW YORK, April 19 (Reuters) - As Valeant Pharmaceuticals considers a multibillion-dollar auction to pare down $30 billion in debt, its challenge will be choosing which assets to sell without compromising any of its key businesses, analysts and investment bankers said.

Investors have lost confidence in the drugmaker's ability to grow profits after its pricing and distribution practices came under investigation by Congress and by federal prosecutors. Its market capitalization has plunged to $11 billion from nearly $90 billion, raising questions about how it can shoulder its substantial debt.

Key shareholders, including activist investor William Ackman, who joined Valeant's board last month, are trying to shore up its finances. The drugmaker is working with investment banks Goldman Sachs and Centerview to assist with potential divestitures, and provide other strategic guidance, Reuters reported on Thursday.

In the process, Valeant will need to ensure that it doesn't forfeit too much cash flow in selling key assets, which could leave its existing debt burden harder to bear.

As a result, the company is more likely to part with a handful of coveted drugs, possibly including gastrointestinal antibiotic Xifaxan, than carve out a major division for sale, according to analysts and investment bankers interviewed by Reuters.

Other assets that could go on the block include skin care products under its Obagi, Cerave and Solta brand lines, as well as toe fungus treatment Jublia, they said.

The company wants to stop short of selling off core divisions, such as Bausch + Lomb, Salix, and Medicis, that are fundamental to Valeant's strategy, they said.

Valeant did not immediately respond to requests for comment.

In December, Valeant's outgoing Chief Executive, Michael Pearson, said the company's debt was about was $6 billion higher than desirable for the long-term, based on earnings figures at the time.

Last month, the company sharply cut its 2016 earnings forecasts. It also pared back its ambitions for near-term debt reduction.

Meanwhile, Valeant has set an April 29 deadline to file its financial statements after missing a March deadline and satisfy the terms of its loans. It is also searching for a new CEO to replace Pearson.

TROPHY ASSETS

A sale of eye care division Bausch + Lomb, one of Valeant's trophy assets, could fetch as much as $20 billion and go a long way toward paying off debt, according to an analysis by Annabel Samimy, an equity analyst at Stifel.

But B&L remains one of the company's most-profitable businesses, potentially delivering earnings before interest, tax, depreciation and amortization (EBITDA) of $1.6 billion in 2016, according to Umer Raffat, an analyst at Evercore ISI. Valeant's overall EBITDA guidance for 2016 the next four quarters is $6 billion.

Giving up cash flow to retire debt "is kind of circular," said one Valeant investor, and could ultimately force the drugmaker to sell significantly more than $6 billion to reach its long-term debt goals. The investor spoke on condition of anonymity because he was not authorized to speak to media.

Several other assets have strong potential for cash flow growth, allowing them to command a high valuation relative to their earnings, according to several investment bankers who spoke on condition of anonymity because they were not authorized to discuss individual companies.

Antibiotic drug Xifaxan is expected to see revenues grow to as much as $1 billion in 2016, a substantial uptick based on fourth-quarter sales of $210 million.

The treatment accounts for about half of the revenues of Valeant's Salix division, and could be worth upwards of $4.5 billion in a sale, according to some analyst estimates.

Other assets, like Jublia, could fare better under different ownership that has better ties to payers.

"These products are more likely to perform better if they were in the hands of other companies," said David Amsellem, an analyst at Piper Jaffray who had downgraded Valeant to an "underweight" rating in March.

Although tempting, Valeant would probably do best to avoid unloading its worst performers, like female libido drug Addyi, which could force it to suffer a writedown on its balance sheet and further depress its stock, according to one of the investment bankers.

Valeant bought Addyi for $1 billion shortly after it was approved for the U.S. market in 2015, but it has since struggled to gain traction among doctors and patients.

In recent weeks, the task of curbing Valeant's debt has become increasingly urgent as downgrades in its credit rating and ongoing negotiations with creditors threaten to raise the company's cost of capital.

Last week, Standard & Poor's cut its corporate credit rating on Valeant to 'B' from 'B+' and its secured debt rating to 'BB-' from 'BB'.

Valeant has recently settled with some of its lenders after a missed deadline for filing its 10-K annual report put the company at risk of a default. It has secured an extension until May 31, but has pledged to file its statements toward the end of this month. (Reporting by Carl O'Donnell; Editing by Michele Gershberg and Alan Crosby)

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