Believe it or not, one of the best-performing healthcare stocks so far this year is none other than Valeant Pharmaceuticals International (NYSE: VRX) . Longtime loser Valeant is up around 20% year to date -- much better than most healthcare stocks.
But is Valeant stock now a smart pick for long-term investors? Here are the arguments for and against buying the stock.
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Buy -- it's the turnaround opportunity of a lifetime
Let's start with the case for buying Valeant. The drugmaker's CEO, Joe Papa, said not long after he took the helm in 2016 that Valeant "is the turnaround opportunity of a lifetime." Based on the company's first-quarter results reported in May, there's reason to think that Papa might be right.
Valeant has sold off several noncore businesses over the last couple of years. As a result, the company's debt has been reduced by more than $5 billion. And while the loss of these businesses has negatively impacted year-over-year comparisons, Valeant's remaining businesses are doing relatively well overall.
The biggest moneymaker for the company is its Bausch & Lomb/international segment. This unit is such an important part of Valeant that it's changing the name of the company to Bausch Health Companies in July 2018. Adjusting for divestitures and discontinuations, sales for the Bausch & Lomb/international segment grew organically by 2% year over year in Q1.
However, Valeant's primary growth engine right now is its branded Rx segment. The segment posted organic growth in the first quarter of 8% adjusting for divestitures, discontinuations, and currency fluctuations. Gastrointestinal drugs Xifaxan and Relistor enjoyed especially strong sales momentum.
Valeant should also be able to get help from new products that either have been recently launched or could be launched soon. These products include glaucoma treatment Vyzulta, over-the-counter eye drop Lumify, and plaque psoriasis medication Bryhali.
In addition, Valeant stock trades at an attractive valuation. I think the enterprise value-to-EBITDA ratio (EV/EBITDA) is the best valuation metric to use with Valeant, because it includes the impact of the company's debt. Valeant's EV/EBITDA ratio currently stands at a relatively low 9.
Stay away -- there are still too many problems
Valeant has made some progress in reducing its debt. However, the company's total debt load is still over $25 billion. Valeant is also running out of noncore assets to sell that could make a significant impact in lowering the debt more. In the meantime, Valeant continues to spend more than $400 million every quarter just to service the debt. The company barely generates enough free cash flow to pay its interest expense.
Current growth rates for Valeant's Bausch & Lomb/international and branded Rx segments aren't enough to enable the company to cut its debt much. But there's also another segment that continues to experience sales declines. In the first quarter, revenue from Valeant's U.S. diversified products business dropped 14% year over year. Even after adjusting for divestitures, discontinuations, and currency fluctuations, sales for the segment still fell 9% from the prior-year period.
What about the impact of new-product launches? They will no doubt help. The question, though, is by how much. Joe Papa likes to refer to the company's "significant seven" -- new products that he thinks will help Valeant return to growth. Papa stated in March that these seven products could generate peak annual sales of more than $1 billion.
So far, however, that goal remains far out of reach. In 2017, the five products of the "significant seven" that were on the market combined for less than $100 million in revenue. Granted, one of those products -- psoriasis drug Siliq -- wasn't launched until July 2017. Siliq hasn't made a big financial impact for Valeant yet, though.
To buy or not to buy?
At least one Wall Street analyst is convinced that the case for Valeant is solid. Barclays analyst Douglas Tsao recently upgraded the stock from "equal weight" to "overweight." Tsao also raised his price target for Valeant from $20 per share to $29. This upgrade and price target hike caused Valeant stock to jump on Wednesday.
I'm still not sold on Valeant, though. The company has definitely made progress under Joe Papa's leadership. However, there's a long way to go. The stock's nice move resulting from the Barclays upgrade makes me even more hesitant about the upside potential for Valeant. I continue to root for the company's turnaround, but my view is to do so from the sidelines.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. The Motley Fool has a disclosure policy .