Valeant investors cheer turnaround effort after Q3 results, but can it stick?

Valeant has reduced its debt by $6 billion since last year's first quarter, the drugmaker reported on Tuesday.

For any investors still on board at Valeant, Tuesday's third-quarter results provided a welcome dose of good news as the company labors toward a turnaround. 

The drugmaker reported that it has paid down $6 billion of debt since the first quarter of last year. The company made $1.3 billion in profit for the quarter and shares were up 16% Tuesday morning. 

The results come after a tough couple of years for Valeant that have featured investigations, lawsuits and more. Altogether, the company has lost 95% of its value from peak as investors fled for the doors one by one. Prominent investor Bill Ackman stayed with the company for years before exiting back in March with a $4 billion loss, news that sent shares down even further. 

Still, with new CEO Joseph Papa at the helm, Valeant is pressing ahead. On Tuesday, the company reported that Bausch & Lomb sales were up 1% year over year and Salix sales increased 3%, helping somewhat to offset declines elsewhere. All told, Valeant's sales fell 10% versus last year's third quarter as it looks to narrow its focus.

Wells Fargo analyst David Maris isn't convinced things have improved. He wrote in a note Tuesday afternoon that the "the overall longer-term trend remains negative for the base business" due to factors including the debt load and a dermatology business that was down 34% versus last year. He also pointed out the company's R&D spending, at 4% of revenue, is "well below peers."

Part of the turnaround story has been Papa's effort to simplify the business and cast off units for cash to pay down debt. Valeant has sold cancer vaccine maker Dendreon, over-the-counter and prescription drug maker iNova Pharmaceuticals and dermatology outfit Obagi Medical in recent months. Those deals brought in $820 million, $930 million and $190 million, respectively. 

In a deal that didn't add cash—but did get rid of an unsuccessful asset—Valeant handed back its Sprout Pharmaceuticals unit and the controversial female libido pill Addyi to former investors this week. It previously had bought the group for $1 billion, plus almost $500 million in contingency payments, and will now get a 6% royalty from future Addyi sales. The problem is that the drug isn't generating meaningful revenue so far. 

Valeant grew at a frenzied pace in years past through M&A before coming under scrutiny for its specialty pharmacy Philidor, which it has since closed, and for extreme price increases. Its M&A debt load weighed on the company's ability to grow through more dealmaking, and it's had trouble boosting sales through organic growth.

There are some signs of a turnaround in that department. Irritable bowel syndrome drug Xifaxan grew only slightly year over year, to $286 million from $273 million, but it's still on track for sales just shy of blockbuster level this year, with $704 million so far in 2017. But Relistor, the drug Valeant had pegged as another $1 billion-plus product, is far short at just $17 million for the quarter and $46 million for the first nine months of the year.