Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Looks like we've got a new candidate for a Valeant Pharmaceuticals International Inc. inflection point.

Valeant reported third-quarter earnings and revenue Tuesday morning that beat (lowered) analyst expectations. And for the second quarter in a row, the company defied analyst expectations by maintaining earnings guidance, despite having divested several assets. Shares jumped 15 percent on the news. 

The drugmaker is on steadier ground than it was a year ago. But, as ever with Valeant, things are not as simple or as rosy as they seem.

Jumper
Valeant shares jumped on positive third quarter earnings results
Source: Bloomberg

There are some legitimately positive trends for Valeant. It has been more successful at divesting assets and chipping away at its $27.4 billion debt pile than I expected. There are some signs of life in its gastrointestinal drug business; the unit's key medicine Xifaxan grew sales in the quarter relative to the same period last year. Valeant got FDA approval on November 3 for an eye drug it thinks can be a future growth driver. 

But the overall business continues to struggle. Revenue declined 10 percent overall from a year earlier,  and by 17 and 34 percent in its branded and diversified product units, respectively. Valeant cut its full-year revenue guidance for the second time this year. While the company said it's confident its "core" business will grow next year, there's a chance overall sales will drop in 2018 as well.

Step Down
Valeant revenue continues to decline, despite positive trends in parts of its business
Source: Bloomberg

Valeant's adjusted Ebitda beat analyst expectations but still fell 18 percent from the same period last year. And sticking with its guidance for that measure required gymnastics, just as in the previous quarter.

In both quarters according to Valeant, higher-than-expected revenue from old drugs -- due to delayed competition and "transactional and FX gains" -- have perfectly offset the negative impact of divestitures and Valeant's poor overall performance. The only thing Valeant should get credit for is making very conservative assumptions about competition for its older medicines early in the year. Big sales declines are still inevitable next year.  

Balance Beam
Valeant has been able to maintain its Ebitda guidance due to a couple of unsustainable factors
Source: Valeant

Cost-cutting also played a role in Valeant's earnings success. The company now believes full-year R&D and SG&A spending will be lower than it expected in the spring. After an earlier uptick, R&D spending relative to sales has fallen back to 2015 levels on a lower sales base (though divestitures had an impact).

Back Down
A recent trend toward more R&D spending at Valeant may be reversing
Source: Bloomberg

This parsimony isn't likely to continue. Valeant needs to spend to launch new medicines, and it must develop assets internally because its debt load will lock it out of M&A for some time to come. 

Parts of Valeant's progress are real, and it has successfully pushed its debt reckoning into the future. But don't be too quick to call this a definitive turning point for Valeant's business or stock. There's still a lot of work to do, and previous efforts to call a bottom have been unsuccessful.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net