What happened

Shares of Valeant Pharmaceuticals (NYSE:VRX), an embattled drugmaker that had primarily grown its business through price increases and acquisitions until recently, exploded higher by 24% in December, according to data from S&P Global Market Intelligence. There appear to be three primary catalysts behind this bullish surge in Valeant's stock.

So what

Arguably the biggest factor in Valeant's end-of-year ascent was the company's significant drop-off in short interest (investors who make money if a stock goes down) toward the end of November. Between mid-November and the end of that month, short interest fell by nearly 22% to 32.02 million shares held short from closer to 41 million. 

Dice with the words buy and sell written on them being rolled atop a digital stock chart.

Image source: Getty Images.

Not only do fewer shares short signify less in the way of pessimism toward Valeant, but it might also imply that a short squeeze has played a key role in pushing the stock higher. You see, short-sellers' gains are capped at 100% if a stock goes to $0, but their losses are unlimited, as there's no ceiling with regard to how high a stock price can go. These short-sellers may have had little choice but to cover their shares as Valeant's share price appreciated, and in the process pushed Valeant's stock even higher as they headed for the exit.

Second, the Food and Drug Administration's approval of Bausch & Lomb's Lumify, an over-the-counter eye drop with low-dose brimonidine for the treatment of eye redness, is another feather in the cap for Valeant's top-performing core brand. Bausch & Lomb has a genuine shot at meeting or exceeding management's organic growth expectations set at the beginning of the year of roughly 5% to 7%. Diversifying its portfolio of products is just another reason for Valeant shareholders to be thankful for the Bausch & Lomb brand. 

Lastly, some credit should be given to Valeant and Pershing Square Capital Management announcing a resolution to a long-standing class action lawsuit filed against the duo by Allergan (NYSE:AGN). Both parties had been accused of improperly trading ahead of a hostile bid for Allergan. Under the terms of the agreement, no guilt will be admitted, but $290 million will be paid to settle the suit, of which a third will come from Valeant. 

A person using binoculars to look into the distance.

The long-term outlook still looks gloomy for Valeant. Image source: Getty Images.

Now what

On a larger scale, the bigger news in 2017 was that Valeant took notable steps forward with regard to improving its financial situation. CEO Joseph Papa announced that, following multiple divestitures, Valeant has reduced its debt by well over $5 billion since its peak. It's also refinanced its debt on multiple occasions, pushing maturity dates out many years from now, which should allow any turnaround plans to take shape. We've even witnessed organic sales growth from its core operating segments: Bausch & Lomb and Salix Pharmaceuticals. 

However, these are baby steps compared to the bigger picture. Papa has suggested that Valeant is done divesting noncore assets and plans to reduce debt the old-fashioned way going forward: by paying it down with operating cash flow. But the thing is that all of Valeant's debt restructurings have led to higher interest rates and fees on its remaining debt. It's made virtually no headway on reducing its quarterly interest expenses despite reducing its total debt by over $5 billion. That's not good, and it's going to leave the company with very little in the way of cash flow to pay down its principal.

My suggestion has been, and remains, that investors exercise extreme caution with Valeant. Though things have improved, the company isn't exactly firing on all cylinders.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. The Motley Fool has a disclosure policy.