What happened

Shares of Bausch Health Companies, Inc. (NYSE:BHC) were up 13.5% as of 11:02 a.m. EDT on Wednesday. The big move came following an announcement from the drugmaker, formerly known as Valeant Pharmaceuticals, that it had reached a settlement with Actavis Labs, which is owned by Teva Pharmaceutical (NYSE:TEVA), regarding a patent battle over gastrointestinal drug Xifaxan.

Under the terms of the agreement, Actavis will receive nonexclusive rights to market a generic version of Xifaxan 550 mg tablets in the U.S. beginning in 2028. However, Actavis will be allowed to market its generic version of Xifaxan earlier if another generic version of the drug wins approval and reaches the market prior to Jan. 1, 2028.

Two businessmen shaking hands.

Image source: Getty Images.

So what

Bausch Health's settlement with Actavis was important for a couple of reasons. First, it removes the dark cloud hanging over the company related to uncertainty for Xifaxan. The drug is a key part of Bausch Health's turnaround strategy. Strong sales growth for Xifaxan in the second quarter helped the company keep its momentum going by topping analysts' estimates. 

The other reason the settlement was viewed favorably by investors is that it seems to be a good deal for Bausch Health. Xifaxan's key patent expires in 2029. Actavis isn't getting a big head start in launching its generic version. In addition, Bausch Health won't have to make any financial payments to Actavis and will maintain all of its patent protection rights for Xifaxan.

This last point is perhaps the most critical aspect of the deal. Bausch Health CEO Joe Papa stated as much in his comments in the company's press release, saying, "This agreement reflects the strong intellectual property rights protecting Xifaxan, which is important for our company, and more importantly, the patients we serve."

Now what

Investors will now be able to watch to see if Bausch Health can truly become the great turnaround story that Joe Papa has said it would become. The company still has a long way to go, though. Its debt level remains very high. Divestitures made to lower the debt have resulted in lower revenue for Bausch Health. Still, the agreement with Actavis removes one obstacle for the company making a nice comeback.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bausch Health Companies. The Motley Fool has a disclosure policy.