Another reason to cheer this deal is the valuations Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was able to get for the assets. Valeant had bought Dendreon two years ago for $400 million. The sales price of $818 million shows more than 100% profit for Valeant. As for Valeant’s skincare brands, the expected 2016 revenue is about $168 million. So the valuation of $1.3 billion translates to a sales multiple of ~7.7x. Many analysts were skeptical about Valeant getting a good price for its assets, as everyone knew that the drug maker was in a desperate situation. Analysts expected bidders to bargain hard. The premium valuation has proved many skeptics wrong. According to BMO’s Gary Nachman, Valeant has received “a solid price” for its assets. To quote him:
“We think that is a good price and demonstrates Valeant’s willingness to part with some core assets if the valuation makes sense. We view that as a smart business decision given the urgency for Valeant to pay down its significant $30bn debt level more aggressively…”, “There is still more to go with asset sales, but we view this as a good start for Valeant.”
The company plans to pay off $5 billion in next one and a half years. Valeant’s CEO Mr. Papa said on CNBC that the money is going to come from asset sales as well as company’s operations.
“combination of asset sales – additional asset sales of our noncore assets – plus the operation results of our company. It’s the combination of both of those that we think will get us that $5 billion over the next 18 months,”
But many analysts are questioning the company’s ability to pay off a significant portion of debt using its cash from operations. The problem is that assets sales, while reducing the debt, will also impact its revenues and profit. Valeant needs to maintain a balance between asset sales and retaining strong assets for its future operations. (Also read: Can Gilead Sciences Inc Turn Around Its HCV Sales?).
Valeant stock Is A Risky Bet
The planned asset sales have been received well by the market, evidenced by the strong performance of company’s stock and bonds in yesterday’s trade. But the company still has a long way to go. The company needs to sustainably reduce its debt burden over the next few years. The stock is still not completely out of the woods. But the current attractive valuations provide an opportunity for risk seeking investors. The company is trading at a price to sales ratio of 0.57 and Forward PE of 3.15. The consensus price target for Valeant stock is $23.97 a share, representing an upside of 44%.
The article Is Valeant Pharmaceuticals Intl Inc (VRX) Stock Back From The Dead? originally appeared on amigobulls.com. Watch our analysis video on VRX.
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Additional Links:
(2) http://aswathdamodaran.blogspot.in/2016/11/faith-feedback-and-fear-returning-to.html
(3) http://amigobulls.com/articles/why-valeant-stock-continues-to-fall?&ref=im
