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Valeant (VRX) To Sell Obagi for $190 Million to Lower Debt

Valeant Pharmaceuticals International, Inc. VRX announced that it has entered into an agreement to sell its Obagi Medical Products business for $190 million in cash to Haitong International Zhonghua Finance Acquisition Fund I, L.P.

The company acquired Obagi in 2013. Obagi products help minimize the appearance of premature skin aging, skin damage, hyperpigmentation, acne and sun damage.

Debt reduction continues to be a priority for Valeant. The company will use proceeds from the sale to permanently repay term loan debt under its senior secured credit facility. The transaction is expected to close in the second half of 2017.

The divestiture of non-core assets should help the company streamline its product portfolio and focus on core areas of dermatology and lower debt. The company expects to pay down $5 billion of debt from divestiture proceeds within 18 months from Aug 2016. The company reduced its debt by $4.3 billion since the first quarter of 2016.

The company earlier sold its equity interests in Dendreon Pharmaceuticals, Inc. to the China-based Sanpower Group Co. Ltd. 

Once an acquisition giant, Valeant has been caught up in various controversies due to price hike of specialty drugs, erroneous financial reporting and termination of contracts with Philidor Rx Services. After a tumultuous period, Valeant started a rebuilding process with its new CEO, Joseph C. Papa. Even though it is still early to comment on the rebuilding process, but the company’s efforts to sell non-core assets and pay down huge levels of debt is commendable and should bode well in the upcoming quarters. The dermatology business witnessed some positive trends as the average selling price stabilized. The GI business continues to struggle with weak sales of Xifaxan but is expected to gain market share with an improved sales.

Shares of Valeant have underperformed the Zacks classified Medical-Drugs industry in the last one year. The stock has lost 30.2% against the industry’s 0.6% gain.

Zacks Rank and Stocks to Consider

Valeant carries a Zacks Rank #5 (Strong Sell).

Some better-ranked health care stocks in the same space are Enzo Biochem, Inc. ENZ, Sanofi SNY, and Exelixis, Inc. EXEL.  While Enzo Biochem and Exelixis sport a Zacks Rank #1 (Strong Buy), Sanofi carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Enzo Biochem’s loss per share estimates narrowed from 12 cents to 7 cents for 2017 and from 11 cents to 3 cents for 2018, over the last 60 days. The company delivered positive earnings surprises in each of the trailing four quarters, with an average beat of 55.83%.

Exelixis has delivered positive earnings surprises in all the four trailing quarters with an average beat of 512.11%. Exelixis’s shares have soared 75.4% so far this year.

Sanofi’s earnings per share estimates increased from $3.08 to $3.18 for 2017 and from $3.26 to $3.30 for 2018, over last 60 days. The company delivered positive earnings surprises in three of the trailing four quarters, with an average beat of 5.10%.

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