Here's How Valeant Pharmaceuticals Hopes to Get Back on Track

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Valeant Pharmaceuticals' (NYSE: VRX) second-quarter earnings report didn't include any surprises, and despite lackluster results, the company's plan to get back on firm financial ground helped shares soar earlier today. Can Valeant Pharmaceuticals overcome its challenges and get back to growth? Here's how CEO Joseph Papa plans to do it.

No. 1: Rekindle growth in dermatology

Valeant's top line slid versus a year ago during the second quarter, and a good amount of the blame for the drop falls on a tepid performance for former top-selling dermatology drugs, including Jublia.

The company's dermatology drugs have struggled to make up prescription volume since Valeant shuttered its specialty distribution deal with Philidor last fall amid scrutiny, and in Q2, Jublia's sales declined 69% year over year to just $31 million. Sales of Elidel and Targretin, two other dermatology drugs, also dropped by 25% and 24% from last year, respectively, and overall, dermatology sales of $208.4 million in the quarter were down 55%.

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To reignite demand for its dermatology drugs, Valeant inked a distribution deal with Walgreens Boots Alliance last year. However, that deal hasn't paid off as quickly as some had hoped. Walgreens Boots Alliance gets a service fee for filling patient scripts at its thousands of locations, but reimbursements from payers to Valeant earlier this year were slow to come, and sometimes inadequate to turn a a profit.

The company's working with Walgreens Boots Alliance to overcome some of the hurdles associated with the early stages of this 20-year deal, and according to Valeant's Q2 slide presentation, those changes have restored net profitability to new dermatology prescriptions this month. Since the dermatology market is growing 15% annually and Valeant still retains 16% market share, getting this business back on its feet is very important to its turnaround.

No. 2: Advance sales of "growth" drugs

The company's buy-reprice-relaunch acquisition strategy and limited R&D spending has caught a lot of heat in the past year, but there's some evidence that recently launched and soon-to-launch drugs could pay off for investors.

The company boasts 62 late-stage U.S. R&D programs and 20 new product launches, and it highlighted in its second-quarter results its ongoing commitment to profit from drugs it got when it bought Salix Pharmaceuticals last year for $11 billion.

Brodalumab, a therapy for the treatment of moderate to severe plaque psoriasis, a multibillion-dollar indication, could be one of the most important sources of new revenue. Brodalumab was developed with AstraZeneca (NYSE: AZN), and in trials, it outperformed Stelara, a drug with $2.7 billion in sales in 2015. Earlier this year, an FDA advisory committee unanimously voted for brodalumab's approval, and an official decision from the FDA on the drug is expected on November 16.

Xifaxan, an irritable bowel disease drug that was a big reason behind the company's decision to buy Salix, also offers upside. Xifaxan total prescriptions increased 28% year over year in Q2, resulting in sales of $200 million last quarter. Prescription volume of Uceris, Relistor, and Apriso -- drugs also acquired in the Salix deal -- improved by mid- to high-single digits last quarter from last year, too.

No. 3: Wrestling down debt

One of the biggest knocks against Valeant has been its mountainous debt. The company's carrying $31 billion in debt on its balance sheet thanks to its acquisition-hungry past, and that's translating into $470 million per quarter in interest expense alone.

Right-sizing the company's liabilities is a cornerstone of restoring investor and debt-holders' confidence, and fortunately, CEO Joseph Papa's plans to turn Valeant around include chipping away at what it owes its creditors.

So far this year, Valeant has repaid $1.29 billion in debt, including $880 million that was repaid during the second quarter. Management remains confident it will deliver on its goal to reduce debt by $1.7 billion this year.

Admittedly, that's not a lot given how much is owed, but it's a start. And more debt payments are planned. The company's been reviewing its portfolio for non-core assets to sell, and it says it's identified products that could conceivably fetch $8 billion, based on historical deal values.

The company hopes to sell those assets within the next year to year and a half, and those sales, coupled with ongoing cash flow, have Papa thinking he can unwind $5 billion in debt over the next 18 months.

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Todd Campbell has no position in any stocks mentioned.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him onTwitter, where he goes by the handle@ebcapital, to see more articles like this.The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days.

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