What's next for Valeant's Sprout biz? A huge impairment charge, analyst predicts


Poor sales trajectory, check. Scale-back in marketing effort, check. What’s next for Valeant’s Addyi and its maker, Sprout? An impairment charge, if you ask Wells Fargo’s analysts--and a big one, at that.

Valeant critic David Maris expects to see a whopper charge on the carrying value of Sprout--as in, as much as 90% or more, he wrote in a Friday note to clients. And he expects to see it “with next quarter’s results, if not sooner,” he said.

His reasoning? For one, Valeant has already warned in a regulatory filing of a potential impairment. And for two, sales of Addyi--the controversial female libido drug that Valeant shelled out $1 billion to gain access to--are dismal. In July, they had reached just $696,235, Maris wrote, citing IMS data--a far cry from the $100 million to $150 million the Canadian drugmaker forecast for this year.

Valeant’s Addyi estimates seem especially high considering an April report that the embattled company had axed the contract sales force promoting the closely watched slow starter. And “in our experience, a material change to a sales outlook would be a trigger for an impairment test,” Maris wrote, noting that “we believe Sprout/Addyi may be worth $50 million or less.”

And when the “overdue” impairment does finally come, investors will feel the burn, Maris says. He expects to see the write-off cut into 2017 EPS and beyond by 14 cents per share, though that’s not necessarily even the worst part.

“We believe there may be other assets that face this same problem, compounding Valeant's divestiture plans, as Valeant would lose not only the cash flow from the products, but the addback to adjusted EPS of potentially overstated intangible asset amortization,” he wrote.

Those divestiture plans are key to new skipper Joseph Papa’s turnaround plans for Valeant. The former Perrigo chief is looking to generate cash to pay down the mountain of debt--built up during ex-CEO J. Michael Pearson’s serial dealmaking days--and ease investors’ default worries.

And Valeant has already seen some interest, too. The helmsman of Spain’s skincare-focused Almirall, for one, has expressed interest in snatching up pieces of Valeant’s business, though in July he told Reuters his company was still “waiting for more information.”

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