Valeant Pharmaceuticals International Inc. (NYSE:VRX) has taken its first significant steps towards de-levering its balance sheet, announcing the divestiture of Dendreon and several dermatology brands (including CereVe) for combined cash consideration of ~$2.1 billion. While Canaccord Genuity views these moves to be positive, it nonetheless believes that the announcements underscore the potential challenges ahead for the company within this process.
The ability to achieve higher valuations probably will require giving up higher-growth products (in this case, CereVe, which has demonstrated >20% growth over the past two years); also, potential buyers may not be able to achieve the same synergies identified by Valeant when the assets were acquired. Following these divestitures, Canaccord estimates that Valeant will have total debt of $28.3 billion remaining, representing a leverage ratio of 6.9x forward EBITDA (down from 7.1x previously).
While the announced asset sales are the largest to date, Canaccord notes that the valuations achieved are only marginally accretive to Valeant’s leverage ratio. Valeant currently trades at 8.4x EV/ adjusted EBITDA based on Canaccord 2017 forecast, compared to peers at 8.9x; Canaccord revised target price of US$19.00 represents a 8.6x multiple. Given Valeant’s elevated leverage, lower growth, and higher risk profile, Canaccord believes that a discount to the specialty pharma peer group is warranted.
Valeant claims to have identified ~$8 billion worth of non-core assets that it could potentially sell to reduce its debt load. Although Canaccord estimates the sale of the dermatology brands have fetched a ~13x multiple, estimated average multiple (including Dendreon) was closer to 9.7x.
Valeant indicated that the sale of Dendreon (acquired out of receivership in 2015 for $400 million) to Sanpower Group for $820 million represents a ~7.0x EBITDA multiple, which, upon review, appears reasonable for a likely low-growth product. Regardless, Canaccord views this divestiture as a good return for a non-strategic asset.
Positive data from a second Phase III study of IDP-118 suggest that there are still sources of growth within the company’s pipeline. However, because Canaccord have yet to see the safety data from these trials and the analysts do not expect an approval for IDP-118 until 2018, have not yet included upside from this product in the model.
Canaccord value Valeant using a DCF approach using a WACC of 12.0% and terminal growth of (2%). Following these asset sales, Canaccord has eliminated the contribution from the divested products from the model and applied the cash proceeds against Valeant’s debt. As a result increasing target price to US$19.00 (from US$17.00).