Valeant divestments to reduce leverage ratio

Published By: Myrna Salomon on January 11, 2017 01:30 pm EST

Valeant Pharmaceuticals is finally looking to actively address its debt load problem and has taken first steps to address its absurdly high leverage ratio. Canaccord Genuity has taken note of the recent divestitures made by the company and has therefore raised the price target on the stock. Analyst Neil Maruoka commented that the management of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) is now moving in the right direction with regards to its policies regarding the debt load.

Earlier this week, Valeant announced that it will be selling of its Dendreon, one of the company’s most significant cancer assets, along with a few of its dermatology brands. The complete package will fetch the company a consideration of about $2.1 billion, including CereVe, one of the major skin care products of Valeant.

While the divestitures are a positive sign that the company has actively started to shape its balance sheet and address the gigantic leverage ratio, it also highlights that Valeant might need to make some tough decisions regarding some of its core assets down the line. The analyst notes that CereVe was one of the key growth drivers for the company and yielded more than 20% growth in the past two years.

In order to maintain a higher valuation, Valeant might need to give up a significant number of large growth products. Furthermore, the analyst believes that the company’s acquiring the said assets might not have similar synergies as Valeant with the products and this might lead to the demise of the brand altogether. After accounting for the sale of the above mentioned assets, the total debt load of Valeant will be $28.3 billion, while the leverage ratio of the company will be down to 6.9x from 7.1x.

The analyst reaffirmed his hold rating on Valeant but raised the price target to $19 from $17. The analyst opinions for the company are three buy, 13 hold and 5 underperform ratings. The stock now trades at a price of $15.62 and has declined by 4.76% since the open.