Why Valeant Pharmaceuticals Stock Is Soaring Today

By George BudwellMarketsFool.com

What happened

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As of 1:15 p.m. EDT, Valeant Pharmaceuticals (NYSE: VRX) stock is up by a noteworthy 26.6% as the result of a surprisingly upbeat adjustment to its 2017 annual guidance. As part of its first-quarter earnings report, the drugmaker upped its full-year adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to between $3.6 and $3.75 billion, compared to its prior guidance of $3.55 to $3.70 billion. The company also lowered its debt load by a hefty $1.3 billion during the three-month period.

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So what

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Valeant has been struggling to reinvent itself and regain the trust of investors, after well-documented problems that include unsightly price increases to some of its medicines, poor internal controls, and untenable amounts of debt. Now that Valeant seems to be slowly walking back from the cliff based on today's positive earnings report, this beaten-down pharma stock appears to be getting some welcome relief from short-sellers.

Now what

Although Valeant has now knocked $3.6 billion off of its debt load since the first quarter of 2016, the company still has a lot of work to do to strengthen its balance sheet and complete a turnaround. Valeant exited the first quarter with a whopping $28.9 billion in debt remaining on its balance sheet, which is a serious problem for a company that's generating less than $1 billion in free cash flows per quarter.

The point is that Valeant is almost certainly going to have to divest at least some of its core assets to truly address its debt problem; these may include key cash cows like the eye-care unit Bausch & Lomb, or its Salix business. Otherwise, this debt issue is going to hang over the company for the next decade, or perhaps longer.

Bottom line: Valeant is eventually going to undergo a major face-lift, and there's no telling what the company will look like a year or two from now. That's why it might be best to approach this comeback story with a healthy dose of skepticism for now.

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