CEO Of Valeant's "1B Headache" Is Stepping Down

According to reports, Cindy Whitehead of Sprout Pharmaceuticals is stepping down as CEO:

"I feel like I've seen it through to what I wanted to accomplish," Cindy Whitehead said in an interview with Bizwomen. "It really was to prove the science, get the approval so that women could have this choice for themselves and then really to build the team to have it really come to the realization of the bigger mission, which is the opportunity for this to go global and to be made widely available to women in an affordable way."

Sprout is the maker of Addyi, billed as the "female Viagra." Addyi received FDA approval in August, and Valeant (VRX) acquired the company in October for $1 billion; apparently, her decision to leave was mutual.

The Situation

Addyi was designed to treat low sex drives in premenopausal women. According to Sprout, the drug had previously demonstrated improvements in desire for sex; to help consumers understand the need for the drug, Addyi was billed as the "female Viagra." Valeant had high hopes for Addyi; its international distribution - a key deal synergy - was expected to spur sales. The only problem is that there may not be much to sell.

Sources suggest that in the first few weeks of its launch, Addyi sold only 227 prescriptions. That is in stark contrast to Viagra, which generated over half a million prescriptions in its first month in 1998. Two impediments for Addyi may be: (i) doctors have to be certified to prescribe the drug, and (ii) the drug's side effects.

The FDA requires that doctors get certified in order to ensure they can properly explain the risks. According to Bloomberg, only about 1 per cent of U.S. gynecologists, obstetricians and primary care physicians are certified. Secondly, the drug's side effects include dizziness, fainting and falling blood pressure; they are exacerbated when patients also consume alcohol or hormonal contraceptives. Such side effects and their irritants could limit the universe of women willing to take Addyi.

Does The Drug Actually Work

Prior to Addyi receiving FDA approval, there was debate over the extent to which drugs should be used to treat female sexual dysfunction. Since the FDA approval, there is now a debate over whether Addyi actually works. While Viagra's impact is physical - correcting erectile dysfunction - and potentially more immediate, Addyi is designed to impact desire by working on the nervous system. However, the low number of prescriptions sold call into question Addyi's effectiveness and whether it serves a need.

Impact On Valeant

Valeant has aggressively grown its top line via acquisitions. The deal with Sprout is consistent with that strategy. However, the company could now be at an inflection point. After severing ties with its specialty pharmacy, Philidor, Valeant has put a moratorium on acquisitions (for 18 months) and has promised to pare debt. That said, the company paid about $1 billion for Sprout - $500 million up-front, and another payment expected next year.

In Q3, the company had $1.4 billion in cash. Cash flow could decline going forward due to price cuts in its dermatology drugs and heart treatments. Potential legal and regulatory risks from the Philidor debacle could weigh, in addition to interest expense on its $31 billion debt load. That is a long-winded way of saying that a $1 billion payout for Sprout with little-to-no return is the last thing Valeant needs right now.

I envision potential for liquidity strain if Sprout does not generate positive cash flow over the next few quarters.