Is Valeant’s valuation less than the sum of its parts?

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The plan for Valeant Pharmaceuticals International Inc. is to press on, restoring its reputation under new management and reviving its collection of businesses without doing the deal making that boosted revenue and profit for so long. All the while, of course, negotiating the minefield of headline risk from further potential problems and reassuring lenders that it can pay down its massive debt load.

Is there a better course? As in, throwing in the towel and selling off Valeant's assets to the highest bidders? After all, investors intrigued by the dramatic drop in Valeant stock figure that the shares must certainly be trading below the value of the company's assets.

I'd love to argue that Valeant should just call an end to its grand experiment and auction itself off in bits and pieces. Sadly, though, there's a case to be made that Valeant shareholders might end up with even less that way.

To look closer, we move away from more conventional measures of earnings and turn to what's called "sum-of-the-parts" valuation, a methodology that, given the troubles, more Valeant analysts are turning to. And we will use one of the more pessimistic bits of analysis to illustrate the downside.

Analyst Irina Koffler of Mizuho Securities USA Inc. breaks the company into 12 different segments for her analysis. (Valeant uses just two in its financial reporting.) Its gastrointestinal drug segment, with just more than $2-billion (U.S.) in 2015 sales, is also its most valuable segment, worth about $9.3-billion, she figures. Its emerging-markets business (defined by geography rather than drug) is worth about $7.7-billion in her estimation. Dermatology, just less than $5-billion. All told, Ms. Koffler estimates Valeant's businesses, with a combined $11.3-billion in 2015 sales, are worth just under $38-billion.

Valeant has, however, more than $31-billion in debt that it accumulated buying drugs and drug companies over the years. Back that out, and the Valeant stockholders can count on only $7.5-billion or $21.31 a share left over for them in her analysis. (Valeant's NYSE-listed shares closed at $31.91 on Tuesday.)

Key to Ms. Koffler's views was her decision to cut the price-to-sales multiples she used to value each business. She anticipates lower profit margins across the entirety of Valeant's business as a result of "significant" price rebating, and she believes Valeant's businesses are now less attractive to potential acquirers. "We don't think that management can negotiate attractive multiples for its assets in the current market environment and, furthermore, many of the segments have likely been damaged by pricing and employee exits, and may face significant rebating in the future," she wrote in her Monday downgrade note.

Andrew Finkelstein of Susquehanna Financial Group has examined the idea of selling off major parts of the Valeant business and found good reasons why each potential transaction is problematic. Valeant's Bausch + Lomb eye-care business is seen as attractive, he says, but "the buyer pool seems limited." Some potential acquirers have their own turnaround challenges; others have focused on other segments of health care. And for many, trying to buy some or all of Valeant would be "tax inefficient": Valeant's financial engineering, which served its own shareholders so well for years, has made it complicated for any company to acquire some or all of it without having a tax problem, Mr. Finkelstein says.

Douglas Tsao of Barclays Capital thinks that rather than sell assets, Valeant "might be best off showing some patience" and re-establishing the value of its businesses, as well as reassuring investors by working out issues with its creditors and properly filing its financial reports. "We're inclined to think shares will be considerably higher in 12 months, though we can't completely dismiss that shares could be lower," he wrote. An enterprise value multiple of three times sales yields a $12 stock, he notes.

David Amsellem of Piper Jaffray & Co., however, sees a breakup of the company as "the most logical endgame" – but that doesn't make the shares a buy. Instead, he wrote Monday, "we do not believe [Valeant] shares are investable."

"We do not believe that Valeant is really a company with a coherent core in a traditional sense, but rather is just an entity that over the years has sought to take advantage of a series of arbitrage opportunities: tax arbitrage, expense arbitrage and drug-pricing arbitrage … it is not clear to us how the current, intact entity will be able to restore/build relationships with its myriad customers and stakeholders (just the name Valeant itself has become tainted)."

The parts may not add up to the whole, and the whole has problems that have depressed the values of the parts. It's a sick situation.