Valeant: Uceris Patent Loss Could Further Impair Salix
Summary
- Teva prevailed in challenging patents for VRX's Uceris tablets.
- MYL previously prevailed in challenging patents for VRX's Apriso.
- I estimate the $16B intangibles related to Salix is impaired.
- Apriso and Uceris represent about 19% of Salix's revenue. The loss of exclusivity likely hurt Salix's value even further.
- Potential Salix impairment charges could challenge VRX's $4B equity base. VRX remains a sell.
VRX CFO Paul Herendeen. Source: wsj.com
A Delaware court ruled in favor of Teva (TEVA) in its challenge of patents covering Valeant's (VRX) Uceris (budesonide ER) tablets:
Teva Pharmaceutical Industries Ltd. (OTCPK:TEVJF), (NYSE and TASE: TEVA) today announced that the United States District Court for the District of Delaware has ruled in the Company’s favor in patent litigation involving Teva’s abbreviated new drug application ("ANDA") directed to a generic version of Valeant’s Uceris® (budesonide ER) tablets. At trial in May, the Court found that Plaintiffs did not meet the threshold to establish infringement, and the Court has now issued its written decision confirming that Teva’s ANDA product does not infringe the asserted patent.
“We are pleased to have another legal win on one of our first-to-file PIV patent challenges brought in through the Actavis Generics acquisition.” said Dipankar Bhattacharjee, President and CEO, Global Generic Medicines, Teva. “This presents another first generic opportunity for Teva and we look forward to offering this product to our customers when otherwise able to.”
Teva believes it is the first applicant to file an ANDA for generic Uceris and thus, could be rewarded a 180-day period of generic market exclusivity.
The Situation
An ANDA for generic Uceris could be a step in the right direction for Teva. It is currently reeling from a loss of exclusivity for its blockbuster multiple sclerosis drug Copaxone. An ANDA for Valeant could be devastating. Valeant built its operations via acquisitions, and justified them by raising prices of the target companies and cutting research and development ("R&D"). A loss of pricing power after shuttering specialty pharma Philidor and a loss of exclusivity in certain products has hurt Valeant's revenue and cash flow.
To pare its $28 billion debt load the company has engaged in asset sales. Their financial performance of the company's remaining properties has been uneven. Q2 revenue and EBITDA fell Y/Y by 8% and 21%, respectively. Uceris is indicated for "the induction of remission in patients with active, mild to moderate ulcerative colitis." It generated Q2 revenue of $35 million, down 5% Y/Y. It was acquired as part of Valeant's Salix acquisition.
Valeant acquired Uceris via its acquisition of Salix. Last year VRX bulls were ecstatic over market chatter suggesting Takeda (OTCPK:TKPHF) (OTCPK:TKPYY) would pay up for Salix. However, the deal never materialized. Apparently, Valeant did not think the price was robust enough. Always the skeptic, I assumed a bid too low could have triggered a write-down of Salix's carrying value or caused the market to look askance on Salix's intrinsic Value.
Salix Is A Major Problem
Salix's operations have deteriorated since rumored talks with Takeda ended. Its revenue declined 5% from $436 million in Q3 2017 to $414 million in Q4. In the most recent quarter revenue was $383 million. The unit lost key sales people in the second half of 2016 to a competitor. Management has since beefed up the sales staff and promised to get Salix back on track. However, the rumored price offered by Takeda does not come close to the estimated $16 billion intangibles associated with Salix.
The previous chart reflects my estimate of [i] Valeant's EBITDA by segment and [ii] goodwill and intangibles by segment. The figures are based on Valeant's internal presentations and public filings. In my opinion, there is no math to justify goodwill/intangibles at nearly 22x run-rate EBITDA for Salix.
After the loss of exclusivity for Uceris tablets the value of Salix has likely fallen further. The following charts highlights the unit's revenue mix:
Xifaxan, which treats irritable bowel syndrome makes up 60% of Salix revenue. Another 19% is represented by Uceris tables and Apriso, which treats ulcerative colitis. In May Mylan prevailed in challenging Valeant's patents covering Apriso. At least 19% of Salix's revenue - Apriso and Uceris tablets - has lost exclusivity since the rumored Takeda talks.
Conclusion
Valeant has lost exclusivity for Uceris tablets and Apriso which represent about 19% of Salix's revenue. I estimate goodwill associated with Salix equates to 22x run-rate EBITDA. I think the unit is impaired. The loss of exclusivity for Uceris and Apriso would hasten that impairment. A potential impairment charge could challenge the company's $4 billion equity base. VRX remains a sell.
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Analyst’s Disclosure: I am/we are short TEVA, VRX.
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