Valeant: Confirmation Of The Integrity Of The Balance Sheet

| About: Valeant Pharmaceuticals (VRX)


Valeant finally sold some non-core assets.

The price was better than most expected.

As such, these asset sales prove that the assets on the balance sheet are good, and worth more than the debt itself.

Valeant (NYSE:VRX) announced the disposition of two non-core assets. The first is the sale of Dendreon to the Sanpower Group Co. of China and second, its skin-care brands CeraVe, AcneFree and Ambi to L'Oreal (OTCPK:LRLCY).

In both cases VRX is selling at a considerable profit. Dendreo was purchased by VRX in February of 2015 for $495 million, and is behind sold for about $820 million.

As for CeraVe, AcneFree and Ambi, it is estimated that these assets cost VRX a total of about $150 million in a combination of transactions between 2008 and 2012. So the $1.3 billion price tag leaves VRX with a good onetime profit. In fact Raymond James analyst Hermine de Bentzmann thinks L'Oréal actually overpaid for these assets.

In total, VRX will get about $2.1 billion from the sale of these two assets.

What's important about these transactions is that it confirms what I have said in a previous article (please consider:Why Valeant Pharmaceuticals Is A Buy). And that is the assets are there and real.

In other words, the debt on the company's balance sheet represents real assets. I am mentioning this because everyone thinks VRX has overpaid for everything it ever bought, and its debt is worth much more than the underlying assets. As per yesterday's announcements, it seems VRX paid a good price for these assets, and made a good profit selling them.

The second is the intention of the company to reduce debt. For some odd reason, even as management said again and again that it intends to reduce debt by about $5 billion over the next 18 months, no one seemed to believe them. I never understood the logic of doubting what manages says repeatedly. So now that VRX sold something, I hope everyone takes the company serious from now on.

Moody's issued a statement saying that the asset sales were "credit positive", however stopped short of upgrading its credit rating on VRX:

Global Credit Research - 10 Jan 201

New York, January 10, 2017 -- Moody's Investors Service commented that two recently announced asset sales by Valeant Pharmaceuticals International, Inc. ("Valeant") are credit positive. There is no impact on Valeant's ratings including the B3 Corporate Family Rating, or the negative rating outlook.

I'm assuming when VRX announces further asset sales, an upgrade will come.

What are Valeant's other assets worth?

One question in my mind is, if VRX got such a good price for these assets, what kind of a price could other assets fetch, assuming VRX wants to sell more assets?

Well we wont know unless a sale is made, but we could speculate. As for me, I am absolutely convinced that VRX did not sell Salix to Takeda because the price was not high enough.

This might mean that if VRX were to sell Salix, it might fetch much more than the $10 billion price-tag that was mentioned in the press at the time.

Another interesting aspect of the deal is that VRX is giving up very little revenue for these assets.

For example, the CeraVe, AcneFree, and AMBI product lines have annualized revenue of approximately of $168 million, yet VRX got $1.3 billion, or about 7.7X revenue. Now I don't know what kind of profit the group generated for VRX, however I would guess that on a P/E basis, VRX probably got more than a 20 multiple.

Why is that remarkable? Because VRX itself trades at a P/E multiple of 3, on an adjusted basis!! In other words, if VRX were to be valued similar to the assets it sold, it would be valued at almost $70 billion, as opposed to the $5 billion market cap it has today.

No I am not betting that VRX will reach a market cap of $70 billion anytime soon, I am simply giving you an analogy of just what kind of a price VRX got for these assets, and on a comparative basis how undervalued VRX is.

Finally, yesterday on CNBC CEO Joseph Papa said that the remainder of the $5 billion in debt that he intends to retire, will come from a combination of further asset sales plus operational results.

So in other words, VRX will not be selling assets indiscriminately, simply for the sake of reducing debt. He also said that if the company were to receive an offer for a core asset, he is obliged to take every offer into consideration, but would not sell a core asset unless the price is right.

Bottom line

The sales of the assets that were announced by VRX confirm my suspicions that the assets on the books of the balance sheet are there, and that they might be worth even more than what the company originally paid for them.

As such, it is very difficult for the company to find itself in financial dire straits in the future, by virtue of the fact that it can always sell an asset in order to meet debt obligations.

Having said that, I think it will not come to that, and that VRX will meet most debt obligations from operational results. Yes, if push comes to shove the company might dispose of more assets, however it will be at a price that is worth it.

The company has another $3 billion in debt to retire over the next several quarters. I think that once further debt reduction is completed, rating agencies will upgrade VRX's debt, and that should favor the stock.

I continue to view VRX as a distressed stock trading at bargain prices. My price target for 2017 continues to be $30 a share, and if we see some other asset sales that can fetch these multiples, $30 a share might be the lower end target.

Disclosure: I am/we are long VRX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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