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Here's Why Valeant Pharmaceuticals Intl. Inc. Surged as Much as 10%

What happened

Shares of Valeant Pharmaceuticals (NYSE: VRX), the embattled drugmaker that's traditionally grown through acquisitions and price hikes over the years, surged as much as 10% during Tuesday's trading session after the company released its second-quarter earnings results. As of 1:30 p.m. EDT, Valeant's shares had retreated a bit, with the stock still up a shade over 6%.

So what

For the quarter, Valeant reported $2.23 billion in sales, a nearly 8% decline from the $2.42 billion it reported in the second quarter of last year. Organic growth from its Bausch & Lomb segment, sans divestitures, came in at a healthy 6% during the quarter, which is right in line with management's early-year growth forecasts for the segment.

Salix Pharmaceuticals also grew 16% on a constant-currency and apples-to-apples basis. Overall, though, the Branded Rx segment saw sales dip 3% on a constant-currency basis. The $2.23 billion in sales was right in line with what Wall Street had been forecasting.

Image source: Getty Images.

For its bottom line, Valeant reported a $38 million net loss, which compares favorably to the $302 million it lost in the same period last year. It's also the sixth loss in the past seven quarters for Valeant. GAAP net loss per share was $0.11, but this turned out to be $0.76 per share narrower than the Street had anticipated.

But most importantly, Wall Street appeared to like the progress on the debt front. Valeant recently used $811 million of its proceeds from its Dendreon divestiture to pay down debt to less than $28 billion, although it officially listed $28.46 billion as its total debt by quarter's end. The company remains on track to hit its goal of $5 billion in debt reduction by February 2018.

Looking ahead, Valeant lowered its full-year sales forecast to a fresh range of $8.7 billion to $8.9 billion from its prior forecast of $8.9 billion to $9.1 billion. It also stood pat on its EBITDA forecast of $3.6 billion to $3.75 billion for the year, despite the divestiture of certain assets.

Now what

Heading into the second quarter, investors really wanted to see two things: improvement in the company's core businesses, and an increase in the EBITDA-to-interest coverage ratio that governs its debt covenants. In many respects, investors got decent news on both fronts, which is why Valeant is heading higher today.

Image source: Getty Images.

The company's Bausch & Lomb segment, sans currency moves and divestitures, continues to perform well and is Valeant's rock. Also, 17% growth from Salix's Xifaxan was a nice surprise in Q2. Of course, Branded Rx sales have still been hurt by double-digit declines in dermatology and dentistry sales year to date, so there's still plenty of room for improvement.

In terms of its debt covenants, the $951 million in EBITDA the company generated in Q2 compares more favorably to the $456 million it spent in interest and fees to service its debt. This works out to a 2.08-to-1 ratio, which is its first increase in well over a year. Wall Street wants to see this ratio head higher since it's this covenant that secured lenders use to gauge the safety of their loans.

To be clear, Valeant is far from out of the woods. It still has a lot of work to do to reignite consistent growth in its core franchises. But from the perspective of Wall Street, this was its first decent quarter in a long time.

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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.