3 Critical Clues to Watch in Valeant Pharmaceuticals' Q2 Results

By Markets Fool.com

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Is Valeant Pharmaceuticals (NYSE: VRX) at the threshold of a turnaround? Nothing in the drugmaker's recent stock performance would indicate that's the case. Valeant has lost over three-quarters of its market cap in 2016.

However, Valeant announces its second-quarter results on Tuesday, Aug. 9. There could be some signs in those results that help investors determine whether or not a rebound might be near for the company (and its stock). Here are three critical clues to watch for in Valeant's second-quarter results.

1. Dermatology

Valeant's dermatology business has been in a tailspin. The company's dismal first-quarter results stemmed in large part from plunging dermatology sales. Any signs from the second-quarter results that the situation has improved, even if only by a little, would be tremendously important for Valeant.

One major indication that the worst days are past for dermatology would be resolution of several issues with the start-up of Valeant's relationship with Walgreens Boots Alliance (NASDAQ: WBA). Valeant referred to these issues as "speed bumps" in its first-quarter earnings presentation.A stronger phrase might have been more appropriate.

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After Valeant began distributing dermatology products through Walgreens, Valeant experienced a slowdown in prescription volume, lower fill rates, and significantly lower average selling prices (ASPs). In some cases, Valeant even recorded negative ASPs from dermatology prescriptions filled through Walgreens. In other words, the company was actually losing money on each sale.

As you might expect, Valeant's management team identified fixing these problems with Walgreens as one of their top priorities. The company highlighted some early trends from April and May that reflected improvement.Look for Valeant's dermatology sales numbers in the second-quarter results to find out if the Walgreens woes are truly resolved or if they still linger.

2. Salix products

So far, there's been both good news and bad news from Valeant's acquisition last year of Salix Pharmaceuticals. First, the good news: Salix's lead product Xifaxan generated sales of $207 million in the first quarter, reflecting a 32% year-over-year increase in total prescriptions for the drug used to treat irritable bowel syndrome with diarrhea. What's the bad news? That sales figure wasn't nearly as good as what Valeant expected.

Valeant slashed its full-year revenue outlook for 2016 partially because of lower-than-expected Xifaxan sales. We're not talking about a small difference: The company estimated that 2016 revenue from Xifaxan would be around $390 million less than initially projected.

Several steps have been taken to get things back on track. Valeant put a new person in place to stabilize the Salix organization after significant turnover in its sales team. The company also launched a new education campaign for doctors and patients.

It's probably unrealistic to expect Valeant to solve the Salix sluggishness in one quarter. However, you'll know that the company is on the right track if Xifaxan sales noticeably pick up steam.

There's also at least one bright spot from the Salix pipeline that could help in the days ahead. The FDA recently approved Relistor tablets forthe treatment of opioid-induced constipation (OIC) in adults with chronic non-cancer pain. While the approval didn't come in time to impact second-quarter results, Valeant expects to begin selling Relistor for OIC in the third quarter.

3. Debt reduction

Valeant's nearly $32 billion debt is like an albatross around its neck. It makes every earnings miss and every guidance cut even more painful than they would normally be.

The company stated in June that it had repaid $730 million and would repay another $273 million in scheduled payments during the second half of the year. At that time, Valeant reiterated its commitment to repaying $1.7 billion of permanent debt in 2016. The companyalso said that it should remain in compliance with credit agreement financial maintenance covenants throughout 2016.

To accomplish these goals, Valeant needs tohit its earnings guidance. A big earnings miss could derail debt reduction plans. Valeant's executive team has also mentioned the possibility of selling non-core assets. So far, there haven't been any announcements of deals or even potential deals on that front. If the company hints at the prospects for selling off some non-core operations, that would certainly be good news for investors worried about the big debt load.

Looking ahead

Wall Street is expecting Valeant to report second-quarter earnings of $1.51 per share and revenue of $2.46 billion. The company should be able to make these numbers.But what if it doesn't?

A huge miss would probably cause Valeant to cut its outlook again and potentially jeopardize plans for further debt reduction. That's the worst-case scenario. It could happen, but I suspect it won't.

A relatively small misswould be bad, but it wouldn't be disastrous. The more important thing to watch is for any clues about the company's efforts to address the issues of dermatology, Salix products, and debt reduction. If Valeant is making solid progress on these fronts, the company's long-term prospects might be better than its recent stock performance implies.

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Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.