With Valeant Pharmaceuticals (VRX) in the midst of unloading assets to fight its potentially overwhelming debt load, Deutsche Bank (DB) argues that the rumored sale of its gastrointestinal business, Salix, could enhance value despite a potential near-term hit to earnings and growth prospects.

BACKGROUND: On November 1, the Wall Street Journal reported that Valeant was in advanced negotiations to sell its gastroenterology business Salix to Takeda Pharma (TKPYY) for about $10B comprised of $8.5B in cash plus future royalties, with a deal potentially inked "in the coming weeks," according to people familiar with the matter. The sources indicated there was another, unnamed potential buyer in the mix. Later in the day, Valeant confirmed it is "currently in discussions with third parties for various divestitures including but not limited to Salix." Takeda, meanwhile, stated that "these [media] articles are not based on any announcement by Takeda. Takeda is continuously considering various options aiming to accelerate its growth focusing on prioritized therapeutic areas of gastroenterology, oncology and central nervous system plus vaccines. At any given time, Takeda is in discussion with many parties in these therapeutic areas." The following day, the Wall Street Journal again broke that Valeant was exploring a sale of its eye-surgery equipment business, which sources said could fetch as much as $2.5B, though potential bidders couldn't be immediately learned.

DEUTSCHE BANK WANTS SALE AT RIGHT PRICE: Weighing on a possible sale of Salix, Deutsche Bank analyst Gregg Gilbert argues that, on the surface, divesting what could be a "growthy" and durable business is not a no-brainer. However, if Valeant can secure a high enough price to improve its debt burden, he "can see why the company would do it, particularly as maximizing the value of Salix will likely require significant additional resources and management time." The Wall Street Journal indicated a $10B price tag, and Gilbert's early analysis indicates that figure plus de-leveraging would dilute earnings by about 26%-27% in 2018-2021 but boost discounted cash flow value to $32 from $24 and allow Valeant to focus on the durable growth of Bausch + Lomb and its consumer unit. Separately, Gilbert says his U.K. colleague that covers Takeda believes the business fits the Japanese company's stated M&A priorities in terms of size and therapy area. Though the analyst hopes to hear concrete news on the matter soon "given the amount of uncertainty this speculation has created" and keeps his Hold rating on the stock, Gilbert and team "continue to like the short-term set up" in light of low 2016 expectations, generally increased transparency from the company, management confidence in successful asset sales, and Valeant's apparent willingness to sell even core assets for the right price.

WELLS FARGO SAYS SALE HURTS GROWTH: Commenting on Salix in an early November research note titled "Selling The Stove To Keep The Restaurant," Wells Fargo analyst David Maris said the rumored sale is "more of an acknowledgment of significant challenges rather than a resolution," adding that Valeant's growth profile would be "significantly reduced" if Salix were sold.

PRICE ACTION: Shares of Valeant have slipped 0.7% to $17.32 in afternoon trading. Over the last twelve months, Valeant shares are down roughly 80%.