Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock jumps after the company sold Dendreon for hefty gains.
Shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) jumped more than 14% in pre-market trading yesterday, after the Canadian drug maker announced its long-awaited asset sale plans. The stock later gave away some of its gains after Moody’s released (1) a report stating that the asset sales will not impact its credit rating or outlook, though Valeant’s bond prices jumped by 4.5%.
Valeant is a classic example of a shareholder value destroyer. Once the darling of Wall Street, the stock has lost more than 90% of its value since its peak in 2014 and is down by more 80% in the last one year. The stock has dragged portfolios of the likes of Bill Ackman and Prof. Aswath Damodaran (2). However, the asset sale provides a ray of hope for Valeant’s shareholders.
Valeant Is Still On The Brink Of Bankruptcy
While there were many reasons (3) for the incredible value destruction, one of the main reasons was its wrong growth strategy. The company sought to grow primarily through acquisitions. This strategy resulted in the company taking on mammoth debt. As of Q3, Valeant had more than $30 billion in debt while its shareholder’s equity was around $4.1 billion, resulting in a debt to equity ratio of 7.4.
Such high leverage is very risky for any company, especially for those with low cash positions and negative earnings. Cash balance at the end of Q3 came in at $658 million. For perspective, the net interest expense in the quarter was $467 million and the operating loss of $860 million. The company has $800 million in debt coming up for repayment in 2017 and more than $8 billion due in 2018.
Such a high level of debt, negative growth rates and mounting losses were pushing the company to the brink of bankruptcy. Valeant’s Altman Z score, one of the most reliable indicators of bankruptcy risk currently stands at 0.2. A rating below 1.81 indicates that the company is facing serious default risk. This measure has predictive value in the range of 80% -90%. With mounting losses, declining revenues and increasing bankruptcy risk, the only option for Valient is to pare down its debt through asset sales.
Asset Sales A Good Begining For Valeant
The announced asset sales, while just a beginning, are a move in right direction. The planned sales of skin-care brands to L’Oreal SA for $1.3 billion and its Dendreon division to Sanpower Group Co. for $818.9 million will garner $2.1 billion for the company. While the number is still very small compared to its $30 billion debt, it is still good news. For a start, it’s a move in right direction and shows the management’s strong intent and ability. The repayment will also help the company abide by the covenants in the debt agreements.