What happened

Shares of Bausch Health Companies (formerly known as Valeant Pharmaceuticals) (BHC -0.69%) (BHC -0.75%) have acquitted themselves admirably at the mid-way point in 2018 by gaining 11.8%, according to S&P Global Market Intelligence. What's behind this fairly strong mid-year performance?

The big ticket item, if you will, is that Bausch's CEO Joe Papa has seemingly regained the trust of Wall Street by executing on all phases of his plan to get the company back on track. After a tumultuous period that resulted in a dramatic decline in share price, Papa took over in May of 2016 and quickly instituted a series of changes to get the drugmaker's sky-high debt under control, reduce the overhang from ongoing investigations, and return the company to growth by bringing new medicines online.  

A man in a business suit standing in front of a wall with several white arrows pointing in one direction and a single large yellow arrow pointing in the opposite direction.

Image source: Getty Images.

So what

Bausch's stellar first-quarter results illustrate the positive impact of Papa's turnaround plan nicely. In Q1, for instance, the company reported its first quarterly revenue beat due to organic growth in nearly three years. As a result, Bausch's management raised the company's annual revenue guidance to $8.15 billion to $8.35 billion, up from its prior guidance of $8.10 billion to $8.30 billion. That's a sure sign that things are indeed starting to move in the right direction.   

Now what

Unfortunately, the company is still not in good financial shape. And the recent rejection of the plaque psoriasis therapy, Duobrii, by the Food and Drug Administration is another point of concern for the company. In short, Bausch was counting on newer medicines like Duobrii to help increase free cash flow in order to reduce its sizable debt load; otherwise, the company will be forced to eventually part ways with some of its core assets.

Now, this regulatory setback isn't the end of the world. Bausch, after all, does have the opportunity to reapply for this drug's approval, and some analysts are optimistic that Bausch will get Duobrii on the market soon enough. But it's also no accident that Bausch's shares have now lost nearly 3% of their value since this regulatory setback last month. Therefore, investors may want to proceed with caution while this highly uncertain regulatory process unfolds.