Valeant Pharmaceuticals (VRX) Considers Selling Salix Unit

Yesterday shares of Valeant Pharmaceuticals (VRX) jumped by more than 30% as sources told CNBC that the company is in advanced talks to sell its Salix division to Takeda Pharmaceuticals for about $10 billion. The deal could include $8.5 billion in cash plus future royalty payments to Valeant over time, which should help with the company’s cash flow situation. According to Dow Jones, the two companies could reach an agreement within the following weeks. But no deal has been decided yet because there is also talk of another possible bidder for the Salix unit.

Salix is a stomach drug. The company focuses on licensing and developing drugs for gastrointestinal disorders. In April of 2015 Valeant purchased Salix for $11 billion. So selling the unit now for only $10 billion doesn’t sound like a big win for Valeant. The royalty payments should give it some protection on sales going forward, but it may not be enough to bring the company back to its former profitability. By selling Salix, Valeant aims to tackle some of its hefty debt load. The company’s new CEO, Joseph C. Papa, said earlier this year that paying off some of the company’s debt was part of his plan to rebuild the pharmaceutical company. “If we can sell some of those non-core assets to pay off the debts, it will allow us to pay down our additional debt,” he told shareholders.

Shares of Valeant on the U.S. stock market soared as much as 36% after the news, but ended the day slightly lower at 33% higher, closing at $23.86 a share. Nearly 3 million shares were traded during the 1 day session.

But it’s hard to get excited about Valeant stocks as an investment right now because despite the large pop to its share price yesterday, the stock is still down 75% so far this year. One of the biggest reasons investors have pushed down the price of VRX so much has been due to Valeant’s high level of debt. Valeant has informed investors about making smaller sales before but the move to sell its Salix unit caught people by surprise which was why the stock was up so much yesterday. The company is trying to do the right thing now by selling assets and making itself leaner. But it might be too little too late. Valeant appears to be in a position where it could still make a comeback if circumstances are right, but I would watch the stock for at least two more quarters to see how moment changes before deciding whether or not to invest in the company.

Valeant’s stock performance yesterday was an exception to the general movement of the market as U.S. stocks overall closed lower. The S&P 500 fell to an interim support at 2125 points yesterday, which caused the sell off. There is another support however, at the 200 day moving average which is at 2079 points. This is something to keep an eye on as it’s only an additional 1% decline from where we are at now. The reason why the U.S. stock market sold off is because of 4 large companies. Apple was down 1.82%, finishing the day at $11.47 per share. Pfizer was down 2.05%, Facebook declined 1.14%, and Occidental Pete fell 5.36%. Since the Dow Jones industrial average has both Apple and Pfizer in there, the index closed yesterday 0.57% lower at 18,037 points. At one point it even fell below the psychological 18,000 points mark but ended the day back above it. The Nasdaq Composite meanwhile saw a 35 point decline, and ended the day at 5154 points. The only sector that was up seemed to be materials.

This author has no positions in Valeant (VRX) and does not plan to open any positions for at least 72 hours after publication of this article.

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