Valeant Takes Haircut on 2013 Obagi Deal as Debt Pile Looms, Divestitures Continue
Valeant is working to repay some $30 billion in debt.

Valeant Pharmaceuticals International, Inc. (VRX) is ditching its Obagi  skin care line by selling it for $190 million in cash to Hong Kong-based Haitong International Zhonghua Finance Acquisition Fund I LP.

Shares of Valeant ended the day up less than a percent to $27.37 per share and were up slightly afterhours. 

"The sale of Obagi marks additional progress in our efforts to streamline our operations and reduce debt," said Joseph C. Papa, chairman and CEO of Valeant. "As we continue to transform Valeant, we will remain focused on the core businesses that will drive high value for our shareholders."

The sale comes only a few years after Valeant acquired the specialty pharmaceutical and skin care company in 2013 for $420 million, a move that involved a mid-cap activist's agitations. It is very likely that Obagi Medical Products Inc. would still be independent had Daniel Plants and his Voce Capital Management not shown up in 2013 with an M&A driven activist campaign.

The insurgent fund had been preparing to nominate a slate of dissident director candidates in 2013 to Obagi's board, in a move that came shortly before the company agreed to sell itself to Valeant. The activist fund has had a mostly positive record with his director-contests and his fund made a significant premium when Obagi was sold to Valeant.

The Deal had reported previously that Voce, based in San Francisco, had a net return of 10.3% over five years, with 8.4% returns in 2014 and a blockbuster 32% return year in 2013 on the heels of its activist investments at Obagi. According to a recent investor update, the fund is also up over 9% in 2017 through June, aided by a successful effort to drive a $2.5 billion sale of medical helicopter operator Air Methods (AIRM).

The Obagi announcement arrives as much-needed good news for the company once considered to be a darling of Wall Street, especially as Valeant continues to repay its massive $30 billion debt load. With this deal Valeant will have essentially met its goal of reducing debt by $5 billion

Valeant on July 10 announced that it had agreed to pay down $811 million of its senior secured term loans using net proceeds from its divestiture of cancer treatment maker Dendreon Pharmaceuticals LLC.

Valeant's divestitures this year include the sale of its CeraVe, AcneFree and AMBI skincare brands to French cosmetics company L'Oreal SA for $1.3 billion in cash in a deal announced in January and completed in March.

In June, Valeant agreed to sell its iNova Pharmaceuticals business to a company owned by funds managed by Pacific Equity Partners and Carlyle Group LP  (CG) for $930 million. The transaction is expected to be completed within the second half of the year.

Analysts of Jefferson Research are encouraged by Valeant's recent projections, citing strong earnings quality and balance quality; however, the valuation suggests a lower amount of price risk in addition to weak cash flow quality and operating efficiency. Future drugs to keep an eye on include Relistor Oral, Vyzulta, and Siliq.

Founded in 1988, Obagi Medical Products are designed to address premature skin aging and skin damage. Products are primarily available through dermatologists, medical spas, and other skin care professionals. Quebec-based Valeant forecasts that Obagi's Medical Products should generate approximately $85 million of revenue in 2017.

TheStreet's sister publication The Deal had reported previously that Voce, based in San Francisco, had a net return of 10.3% over five years, with 8.4% returns in 2014 and a blockbuster 32% return year in 2013 on the heels of its activist investments at Obagi.

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