During a third-quarter earnings conference call in November with investors, when asked about divestitures that could help the company chip away at major debt and focus on the main business, Valeant Pharmaceuticals International Inc. CEO Joe Papa said "core assets for us are the dermatology, the gastrointestinal [GI], the eye-care and the consumer side, but we did receive a number of inbound requests to acquire some of our product assets with very significant numbers that we have to evaluate."

Apparently, the debt – about $30 billion worth – won out. Laval, Quebec-based Valeant is selling three skin-care brands to L'Oreal S.A., of Paris, for $1.3 billion, a deal that RBC Capital Markets analyst Douglas Miehm liked to an extent since, on the basis of a multiple of 11 in earnings before interest, tax, depreciation and amortization (EBITDA), "we would have valued these [skin-care] assets at about $850 million," he wrote in a research report. "The only item of note is that these assets should be viewed as 'core' and this calls into question whether or not there is any product group or business that is truly viewed as core to management."

L'Oreal is acquiring the Cerave, Acnefree and Ambi brands, which tally an annualized revenue of about $168 million. Cerave includes cleansers, moisturizers, sunscreens, healing ointments and a dedicated baby line. Growth over the past two years has exceeded 20 percent, Valeant said. Acnefree brand portfolio offers over-the-counter cleansers and acne treatments in the U.S., launched in 1966. Ambi's products are formulated for multicultural consumers and include creams, cleansers and moisturizers in the face and body categories. Cerave was mentioned during the earnings call, when CEO Papa said the "consumer health care business, which includes popular brands like Cerave, is up 7.7 percent year-to-date compared to a year-to-date market average of 2 percent."

Separately, the firm is letting go all equity interest in Dendreon Pharmaceuticals Inc. to the Nanjing, China-based Sanpower Group Co. for $819.9 million. This didn't go down easy for Miehm, either, but for different reasons. Dendreon's only approved product is Provenge (sipuleucel-T), an autologous prostate cancer vaccine, gained in Valeant's takeover of the bankrupt company in 2015. "We estimate [Provenge] revenues of about $290 million in 2016, with EBITDA of about $145 million," he said. "This implies a about 5.7 times EBITDA multiple," and the amount paid "is considerably less than we expected for this long-tail asset," having forecast a value more like $1.8 billion at an 11-times EBITDA multiple in 2017. Just the same, he said, "some investors have called into question Valeant's ability to execute on its commitment to sell assets and, subsequently, we believe this will mitigate" such doubts.

It didn't mitigate much for BTIG analyst Timothy Chiang, who said "heavy debt burden remains an issue. With the company expecting 2017 revenue and EBITDA to be lower than 2016, we think [Valeant] will need to continue to look to drive operating costs lower. We see this goal as potentially challenging, given that the company's business model historically was driven by spending very little on research and development [R&D]. For 2017, we currently forecast R&D spending to increase to about $475 million (up from an estimated $415 million in 2016)," he wrote in a report. Evercore ISI analyst Umer Raffat sounded more upbeat, at least about the price gained by Valeant for the assets relative to the original purchase prices. Valeant bought Dendreon for $495 million, he noted, and the skin-care assets came aboard for about $150 million.

DERMATOLOGY 'DIFFERENT STORY'

Valeant could not be reached but, during the earnings call, Chief Financial Officer Paul Herendeen talked about the company's philosophy with regard to divestitures. "Part of our job to know the value of assets we own [and] if we believe that an asset may be worth more in someone else's hands, and they'll pay us more than what it may be worth in our hands, we should sell that asset," he said. "When someone labels an asset as 'strategic,' it means they want to buy it and can't justify the price or they want to keep it even though someone offers them more than it's worth in their hands. Let me be clear. Our preference is to keep the businesses [that] we identify as core, but not at all costs. This is a requirement for us as a management team and as governed by our board that we be responsible in thinking about the value of what we own and whether we can achieve more value by selling it or by continuing to run it."

Annabel Samimy, analyst with Stifel Nicolaus, asked some hard questions during the call about the firm's GI and dermatology arms. "I'm not really hearing clearly what the distinct strategies are to address them other than reducing costs and investing in R&D, so I'm hearing more Band-Aid solutions. Am I missing something? Is there something distinct that you're doing that's going to offset some of these challenges that you're facing right now?"

Herendeen said "two of the main engines that will drive us forward are the GI group and the dermatology group," where changes were made before he joined the company and a "noticeable positive impact" resulted. "When it comes to total prescriptions and a trajectory [for them], that's the ultimate proof of the pudding for a branded pharma segment. I think we're seeing very good progress in the GI space. That doesn't sound like a Band-Aid. What that sounds like is, we identified an issue. We deployed resources against it. We looked to see if it was effective. Then we hoped to get the results and we're seeing the results in GI." Dermatology, he said, "is a little bit different story and a little bit more complicated," though "there are certainly steps that we have taken and we will continue to take to improve the effectiveness" of that group. Aside from debt, Valeant has had problems aplenty regarding drug pricing and accounting practices. (See BioWorld Today, Feb. 5, 2016, and March 22, 2016.)

Wachtell, Lipton, Rosen & Katz acted as advisor to Valeant in the L'Oreal transaction. In the Dendreon deal, Centerview Partners served as financial advisor to Valeant and Hogan Lovells LLP in the U.S. represented Valeant, while DLA Piper LLP in the U.K. and U.S. acted as legal advisor to Sanpower.