Please ensure Javascript is enabled for purposes of website accessibility

The Undeniable Reason Behind Valeant Pharmaceuticals Inc.'s 43% Rally in November

By Sean Williams - Dec 6, 2017 at 9:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Baby steps have been taken, but there's still a long way for this company to go.

What happened

Shares of Valeant Pharmaceuticals (BHC -5.19%), an embattled drugmaker that had primarily grown by acquisitions and drug-price hikes in recent years, galloped higher by 43% in November, according to data from S&P Global Market Intelligence. While the stock is still more than 90% off its all-time high, the monthly return was one of the best shareholders have seen in recent years -- and they owe it all to the company's encouraging third-quarter operating results.

So what

For the quarter, Valeant reported $2.22 billion in sales, down about 10% from the previous year, as well as $367 million in adjusted net income, down from $510 million in the prior-year period. Scratching the surface, these headline figures don't look very appetizing. However, the underlying details were what excited investors.

A debt ball and chain attached to a bear trap.

Image source: Getty Images.

For starters, the company's two core businesses delivered steady organic growth. Excluding the impact of currency fluctuations and divestitures, its Bausch & Lomb segment grew by a healthy 6%, which is right on target for what management predicted earlier this year. Meanwhile, Salix Pharmaceuticals saw sales growth of 3%, which jumped up to 6% when looked at on an organic basis. Increased sales of Xifaxan and Apriso led the charge higher.

Valeant is also making substantial headway with regard to lowering its debt. CEO Joe Papa had initially targeted $5 billion in aggregate debt reduction by February 2018, but the company has chopped off about $6 billion since the first quarter of 2016. Divestments of noncore assets have played a big role in this reduction, with free cash flow funneled from its operations assisting as well.

We also witnessed Valeant hold firm on its full-year EBITDA (earnings before interest, taxes, depreciation, and amortization) forecast of $3.6 billion to $3.75 billion. While most investors tend to focus on profitability, Valeant's lenders pay closer attention to its EBITDA, since this is what's tied to its debt covenants. Despite divesting assets, Valeant's EBITDA hasn't been cut, which is a positive sign. 

Now what

On the other hand, the company's progress in the third quarter still amounts to baby steps compared to the long walk that lies ahead.

To begin with, while we're seeing strength in its core businesses, there's been ongoing weakness in Valeant's other operating segments. U.S. diversified product sales were an absolute mess on a constant currency basis in the third quarter, with sales down 29%. Neuro and Generics tumbled by 29% and 32%, respectively, somewhat hurt by divestitures but also hampered by organic declines.

A street sign that implies risk ahead.

Image source: Getty Images.

Second, Papa has been pretty clear that he'd like to see the company pay down its debt from here on out without any additional divestitures. Considering how nearly all of the company's cash flow has been funneled to servicing its debt (i.e., paying interest and fees) as a result of numerous restructurings, it could be difficult to make any meaningful headway on its remaining debt (which totaled more than $27 billion at the end of Q3).

Valeant's EBITDA-to-interest coverage ratio also remains notoriously low, even if it has improved a bit from its trough. With $951 million in EBITDA and $459 million in interest expenses in the third quarter, this ratio only stands at 2.07-to-1. While there's no concrete figure that suggests a healthy company, this ratio used to be well above 3-to-1 back in 2015.

Valeant's path to redemption has a long way to go, and following a major move higher in November, I'm perfectly fine suggesting that investors remain on the sidelines.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bausch Health Companies Inc. Stock Quote
Bausch Health Companies Inc.
BHC
$8.58 (-5.19%) $0.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
323%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.