At the time of our last financial report in March, Steve Fraidin and I had just joined the board of Valeant (VRX, Financial) in an attempt to stabilize and enhance our investment in the company. Since we joined the board, the company has hired Joe Papa, an extremely capable and talented CEO, the substantial majority of the board has been replaced, the company has returned to filing its fmancial reports in a timely fashion, its bank debt has been successfully modified to substantially reduce the risk of covenant default, a highly credible and experienced CFO, Paul Herendeen, and General Counsel, Christina Ackermann, have joined the company, a new strategy and new fmancial reporting structure have been announced, and approximately $8 billion of assets are being evaluated for potential disposition.
As a result of the above developments, we believe that Valeant has been successfully stabilized and is on the path to recovery. While we still expect the occasional negative press article about the company due to the ongoing government investigations and civil litigation, continued business progress should begin to focus investors and the public's attention on the company's high quality brands and products and its mission to improve patients' lives. With improved business performance, cash generation and leverage reduction, we expect Valeant's stock price to increase substantially from current levels.
Valeant reported Adjusted EBITDA of $1.09 billion in the quarter and Adjusted EPS of $1.40. This represented sequential improvement vs. Q1 as the business continues to stabilize following the disruption from the events of the fall / winter of 2015.
Management reaffirmed full year 2016 guidance of $4.80 to $4.95 billion of Adjusted EBITDA and Adjusted EPS of $6.60 to $7.00. On the earnings call, management discussed some of the key factors which are likely to accelerate growth through the end of the year including: increased profitability in dermatology, an acceleration in script growth at Salix (principally Xifaxan), emerging markets growth, the launch of Relistor Oral and traditional seasonality in the business.
Management announced specific actions the company has taken in recent weeks to return the dermatology business to profitable growth, including progress in improving the Walgreens distribution arrangement (beginning August 5, 2016), the launch of a coupon program for independent pharmacies (June 27th), a new prior authorization program administered by CoverMyMeds (August 4, 2016) and enhanced pharmacist training and education. Each of these initiatives should help improve the profitability of the dermatology franchise which has been challenged in recent quarters. On the earnings call, management discussed a plan to reduce the cost structure in-line with the current revenue base driven by consolidation of duplicative functions, vendor rationalization and other efficiencies.
The company introduced a new financial reporting structure which will be rolled out later this year. The business will now be aligned across three verticals: (1) Bausch + Lomb / International ("Durable Growth"), (2) Branded Rx ("Growth") and (3) U.S. Diversified Products ("Cash Generating"). This new disclosure provides a more logical and informative description of Valeant's different businesses, which when coupled with greater disclosure, provides investors with a more complete understanding of Valeant's growth trajectory, business durability and quality. Because Valeant's higher quality growth businesses β which represent 80% of revenue β are expected to grow rapidly, while the company's lower quality businesses β which currently represent 20% of revenues β are declining, over time Valeant's overall growth rate and business quality and cash flow durability should improve. This should lead investors to pay a higher valuation for the company over time.
In conjunction with the new reorganization, Valeant announced promotions of current executives and the hiring of three new executives: Christina Ackermann (EVP, General Counsel), Scott Hirsch (SVP, Business Strategy and Communications) and Sam Eldessouky (SVP, Corporate Controller and Chief Accounting Officer). On August 22, 2016, Valeant announced that Paul Herendeen, previously the CFO of Zoetis, would become CFO of the company. We think Paul is a superb choice in light of his long-term track record as a public company CFO in the specialty pharmaceutical industry, including his experience in turnarounds, highly leveraged situations, and his recent tenure at Zoetis where he led a substantial cost reduction initiative. We were very impressed with the work Paul did at Zoetis and are delighted to be working with him at Valeant.
Management reiterated its expectation to substantially reduce leverage in the coming months. The company expects to reduce debt by more than $5 billion over the next 18 months funded primarily by cash flow and to a lesser extent by asset sales. Management announced that it had identified non-core assets which represent a transaction value of β$8 billion or 11 times EBITDA (based on comparable assets sales and/or unsolicited indications of interest) which are being evaluated for divestment. Valeant owns a large collection of highly marketable assets which, due to the highly acquisitive and well-capitalized nature of the pharma sector, should be able to achieve attractive transaction values in our view.
Lastly, management noted that while the company is projected to be in compliance with its financial maintenance covenants under the bank debt through 2016 at current guidance, the "cushion is not as large" as management would like it to be. As a result, the company has negotiated a favorable modification of its bank credit facilities to reduce EBITDA maintenance covenants and permit a greater amount of asset sales.
From Bill Ackman (Trades, Portfolio)'s mid-year 2016 letter.
