Valeant admits defeat on Sprout, trading $1B buy for 6% royalty on a drug that's not selling

Valeant inked a deal to sell Sprout Pharmaceuticals back to the company's previous investors.

When Valeant Pharmaceuticals shelled out $1 billion for Sprout Pharmaceuticals and the controversial female libido pill Addyi in 2015, the company was flying high and plotting an entry into a new treatment area heralded as blockbuster territory.

But like so much at Valeant over the last couple of years, that deal quickly soured—and the drug has proven to be worth a tiny fraction of the sales touted upon its approval.

In a Monday announcement, Valeant said it's selling the small company to a group of former Sprout shareholders in exchange for a 6% royalty on Addyi sales after 18 months. Valeant says it will lend $25 million to the investors to help them get the Sprout operation up and running. The deal is expected to close by the end of this year. 

Valeant purchased Sprout for $1 billion in August 2015, with former CEO J. Michael Pearson calling the buy a "perfect opportunity to establish a new portfolio of important medicines that uniquely impact women." As industry watchers know, things for Valeant haven't gone according to plan since that deal. 

RELATED: Valeant sizes up women's health with $1B deal for Sprout and its libido drug 

Only four days after Addyi's commercial rollout began, a short seller published a report about the company's sketchy specialty pharmacy Philidor. In the months and years to come, Valeant would suffer from numerous investigations and lawsuits about the arrangement, with each new shot hurting its business and credibility along the way. 

Addyi has brought in just $6 million so far this year, Wells Fargo analyst David Maris said in a Monday note, citing IMS Health figures. Buying Sprout was a bad idea to start with, he said, and he gave a thumbs-up to the planned sale.

"Overall, while we did not agree with the company's decision to acquire Sprout, let alone for $1 billion, it is smart to stop investing in a brand that had no prospects of making money for Valeant," Maris wrote.

Valeant's failure to get Addyi sales off the ground hurt more than its top line. Late last year, Sprout investors sued, claiming Valeant had botched the Addyi rollout, in part with high pricing. Part of the initial sale agreement included a provision that Valeant spend at least $200 million on marketing and R&D, according to the plaintiffs. The company was also responsible for employing a 150-person sales force, but Pearson had cut staff as a result of slow initial sales. 

With the new agreement, former shareholders are dropping the lawsuit and Valeant won't have to fulfill those requirements. 

RELATED: Why is Valeant's 'blockbuster' libido drug Addyi a dud? Shoddy marketing, investor lawsuit claims 

Even before the Valeant acquisition, Addyi was controversial. The FDA rejected the drug twice before, and agency officials said it offered only "modest" efficacy. Public Citizen founder Sidney Wolfe, M.D., said in a statement that the drug "presents serious dangers to women, with little benefit." 

Valeant touted Addyi as a potential $1-billion-a-year product but hasn't gotten anywhere near those ambitions. The drugmaker planned a relaunch earlier this year, according to MarketWatch, but the drug still hasn't generated meaningful sales. 

The company came to prominence through a long M&A streak, but since its fortunes turned south has turned to castoffs to pay off debt. It recently sold dermatology outfit Obagi for $190 million and cancer vaccine maker Dendreon for $820 million.