Earnings Hangover Sacks Valeant Pharmaceuticals' Stock, Sending Shares Down 10%

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What happened

Shares of embattled drugmaker Valeant Pharmaceuticals (NYSE: VRX) are pulling an about-face after initially moving higher following the release of its second-quarter earnings results before the opening bell on Tuesday, August 8. While no major developments occurred overnight, it would appear that further digestion of yesterday's earnings news still has Wall Street and investors worried. As of 3:05 p.m. EDT, Valeant's stock was lower by 10%.

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So what

For the quarter, Valeant reported $2.23 billion in sales, which was a nearly 8% year-on-year decline, while its GAAP loss declined significantly to just $0.11 a share from $0.88 per share in Q2 2016. The net loss was considerably narrower than Wall Street had expected, and total sales were in line with expectations. When combined with Valeant's debt-reduction efforts, which are on track to slash at least $5 billion in total debt off its previous load of more than $32 billion by Feb. 2018, investors viewed the headline figures as good.

However, after further review, investors may not be so forgiving about two aspects of Valeant's report. First, the company lowered its full-year sales guidance to a new range of $8.7 billion to $8.9 billion from a previous forecast of $8.9 billion to $9.1 billion. The bulk of this update reflects the impact of divestitures, but Wall Street is probably also not overlooking double-digit sales declines in U.S. diversified products, dentistry, and dermatology. Organic sales growth is imperative for Valeant given its need to grow EBITDA (earnings before interest, taxes, depreciation, and amortization) and keep its secured lenders feeling good about their loans to the company.

The other possible concern could be CEO Joseph Papa's commentary during the conference call that the company is essentially done selling non-core assets in the interim. Non-core asset sales have comprised the bulk of Valeant's debt-reduction efforts in recent months, giving reasonable doubt to investors that the company will be able to make solid headway on its remaining debt with operating cash flow moving forward.

Now what

Truth be told, stocks can move up or down for a variety of reasons in the short tem, and sometimes we simply can't point our finger at an exact source and say, "Yeah, that's the reason this stock is up/down today!" In Valeant's case, that's what's happened today. It's probable that the earnings hangover is responsible for its swoon, but it just could be normal day-to-day price fluctuations, which are beyond our control and not really of importance to long-term investors like us.

The important point here is that Valeant reported a number of very encouraging figures. Of note, organic growth was strong for both of its core brands, Bausch & Lomb and Salix Pharmaceuticals, and its extremely key EBITDA-to-interest coverage ratio, which is tethered to its debt covenants with secured lenders, rose to 2.08-to-1 from 1.83-to-1 in the sequential first quarter. This is all great news.

Unfortunately, Valeant still has a lot of work to do with its massive debt pile, and there are still plenty of pockets of sales weakness left to be resolved. This turnaround story is still very much a work in progress.

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Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. The Motley Fool has a disclosure policy.