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Shares of Valeant Pharmaceuticals (NYSE: VRX), the embattled drugmaker that's predominantly grown through acquisitions and drug-price increases over the years, surged as much as 11% by 3 p.m. EST Friday. What's interesting is that there's no clear catalyst, suggesting that a combination of carryover news and an overall move higher in the broader market is responsible for the rally.
What's probably front and center for Valeant's shareholders is the progress the company has made on its outstanding debt over the past couple of years. Through the end of its third quarter, the company had reduced nearly $6 billion in debt from its first-quarter 2016 peak. That's well ahead of the $5 billion that CEO Joe Papa was targeting by February 2018. It's true that Valeant has used divestitures rather than positive free cash flow to pay down the majority of this nearly $6 billion, but nonetheless, the company and management team have some breathing room to operate.
Valeant has also stood by its full-year EBITDA (earnings before interest, taxes, depreciation, and amortization) forecast, despite selling off a number of noncore assets. This suggest that not only are its two core businesses, Bausch & Lomb and Salix Pharmaceuticals, holding their ground, but that its debt covenants are, for the meantime, on reasonably solid footing.
Valeant sports an exceptionally high short interest, with 34.1 million shares held short, per Yahoo! Finance data. A rising stock price could lead those short-sellers, who have unlimited loss potential, to cover their positions, further fueling a rally in Valeant's stock.
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With steady gains of 0.4% for all three major U.S. indexes on Friday, it looks to be a pretty good day.
While shareholders are undoubtedly relishing the double-digit percentage gains, it's important to keep in mind that one day doesn't make a lot of difference -- especially without any tangible news behind the stock's move. Investing is done for the long haul, and there will be plenty of unexplained up and down movements along the way for stocks like Valeant Pharmaceuticals.
What shareholders should really be paying attention to from here on out is how well the company is able to tackle its remaining debt (more than $27 billion) considering that CEO Papa doesn't want to divest any more assets. Valeant wound up handing over $459 million in interest expenses and fees in the third quarter, so there might not be much left over to organically reduce debt.
Valeant is also going to need to demonstrate to Wall Street that its other operating segments, aside from Bausch & Lomb and Salix, can return to growth.
It'll be no easy march forward for Valeant, and investors should keep their eyes peeled.
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