Valeant Pharmaceuticals (NYSE: VRX) shares are on a tear, and the company's first-quarter financial results show that management is making headway in paying down debt. However, the business itself continues to sputter, and ultimately this rally could be short-lived if sales can't find their footing.
Continue Reading Below
The good news
Valeanthas been struggling to offset declining sales following the closure of its specialty pharmacy in 2015, but it has made solid progress in tackling the enormous amount of debt that built up on its balance sheet because of former CEO Michael Pearson's acquire-reprice-relaunch strategy.
Image source: Getty Images.
In the past year, the company has used cash flow and asset sales to reduce its debt by $3.6 billion, including $1.3 billion in the first quarter.
Importantly, management plans additional asset sales that canshave even more debt from its books later this year. For example, the company's still on track to pocket $820 million from the sale of its prostate cancer drug Provenge.
The bad news
Management deserves kudos for reducing its debt, but despite owing less money to its creditors, the company's spending more money on interest than ever before. In Q1, interest expense was $471 million, up $47 million from last year due to higher interest rates on debt it had to refinance because of upcoming maturities.
The company's ongoing interest payments are zapping cash that the company could otherwise use on growth initiatives, and absent those investments, there's little to cheer about in terms of growth for its legacy products.
For instance, Bausch & Lomb is arguably Valeant's crown jewel, yet its $1.15 billion in Q1 sales barely budged from last year, when sales clocked in at $1.146 billion. Volume did pick up for the unit abroad, but that improvement was largely offset by decliningvolume in the United States.
The company's dermatology business is also a problem. Sales volume for its branded Rx segment continues to fall, and as a result sales in the segment are still declining. In Q1, the segment's revenue was$604 million, down from $665 million last year. The company blamed the decline on increased competition and a negative impact from "high deductible medical plans," two threats that aren't disappearing anytime soon.
Sales are still falling in the company's U.S. diversified products business, too. In Q1, sales decreased 37% year over year to $355 million. Again, the company cited lower volume as the reason behind the drop, and that competition isn't going away.
Also, I'm unconvinced that the company's bottom-line performance shows it's back on track.Yes, Valeant reported $628 million in GAAP-income in the quarter, but that was due to a $908 million one-time income tax benefit tied to a "non-cash internal restructuring."
Valeant is paying down debt, but it still owes nearly $30 billion, and that is going to continue to be a roadblock to investing in mergers and acquisitions and research and development. Undeniably, it's encouraging that the company is taking steps to get itself on firmer financial footing, but until this company's revenue is heading in the right direction, this stock remains too risky for me to want to own it.
10 stocks we like better than Valeant PharmaceuticalsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Valeant Pharmaceuticals wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 1, 2017
Todd Campbell has no position in any stocks mentioned.His clients may have positions in the companies mentioned.The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. The Motley Fool has a disclosure policy.