What happened

Bausch Health Companies (NYSE:BHC) delighted its loyal shareholders last month by gaining an eye-popping 21.6%, according to data from S&P Global Market Intelligence. What sparked this breakout? 

While most healthcare stocks rebounded in June after a rough few months, Bausch's shares got an additional boost from the news of its U.S, launch for its Bausch+Lomb ULTRA multifocal contact lenses for patients with astigmatism and presbyopia.

As an added bonus, Bausch also announced the commercial launch of its plaque psoriasis lotion Duobrii in the United States, as well as the repayment of $100 million in debt toward the tail end of the month. This latest debt repayment eliminated all mandatory amortization for the first quarter of 2020. 

Black and white chalkboard bar chart showing a series of columns, with an arrow above them, illustrating a rebounding trend.

Image Source: Getty Images.

So what

Bausch is in the midst of a slow-motion turnaround. And the future success or failure of this proposed comeback hinges on the launch of new, high-value growth products such as Duobrii. Bausch needs to keep growing its free cash flows in order to deleverage in a timely manner. In the most recent quarter, for example, its debt-to-equity ratio stood at a jaw-dropping 880, giving it one of the most highly leveraged balance sheets in all of healthcare.  

Now what

Can Bausch's stock keep heading higher? Wall Street seems to think so -- at least based on the current consensus price target of $30.93. (Bausch presently trades at about $25.60.) Despite Wall Street's optimism, though, there are some solid reasons investors might want to remain cautious with this comeback story.

For one, the company is years away from cleaning up its balance sheet, limiting its financial capacity for value-creating business development activities. Underscoring this point, the company recently cut a deal to acquire Synergy Pharmaceuticals' woefully underperforming medication Trulance. If Bausch was in a better financial position, it's highly doubtful that it would have taken on such an onerous reclamation project. Put simply, the company might need a hefty dose of luck along the way to complete its long turnaround, thanks to its limited financial capacity.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.