What happened
Valeant Pharmaceuticals (BHC 0.58%) stock started the year off on a sour note by shedding nearly 11% of its value in January, according to S&P Global Market Intelligence . What's behind this double-digit drop?
The specialty pharma's stock tumbled immediately after analysts at Goldman Sachs issued a dreaded sell rating on the company's shares. Goldman's pessimistic outlook reportedly stems from the company's high debt load, new competitive threats to its product portfolio, and the risk of outstanding lawsuits eventually resulting in sizable financial penalties.
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So what
Up until now, CEO Joseph Papa has done an admirable job of turning Valeant around in the face of these daunting challenges. Since taking over, for instance, Papa has paid down over $6 billion in debt ahead of schedule, and he has done so without parting with core segments such as the eye-care unit Bausch & Lomb or its Salix business.
In response, Valeant's stock has more than doubled in value since hitting an all-time low only last May. Goldman's analysts, however, obviously think that Valeant's rebound is starting to run out of steam.
Now what
During Valeant's upcoming Q4 earnings call scheduled for Feb. 28, we should learn a lot more about Papa's plans to continue deleveraging the company in a sustainable manner -- or whether this scenario is even possible. The long and short of it is that Valeant's free cash flow simply isn't enough to make a major dent in its ginormous debt load, which presently stands at $25.5 billion.
The company also can't keep plowing most of its free cash flow into just paying debt. At some point, Valeant must invest significantly more in research and development than it traditionally has in the past in order to generate long-term growth. Valeant, after all, doesn't have the financial flexibility to pursue any bolt-on acquisitions at this stage.
Bottom line: Valeant is nearing an inflection point that may force the company to divest a core asset to service its debt. If that happens, there's no telling where this struggling drugmaker's story will end.
