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Why Valeant Pharmaceuticals Intl Inc. Dropping Is of Little Consequence

Valeant Pharmaceuticals Intl Inc (TSX:VRX)(NYSE:VRX) really can’t catch a break.

The beleaguered pharmaceutical giant tumbled again recently, sinking as much as 10%, with the stock price sinking once again below $20.

Valeant was once the darling of the market, with a stock price north of $200 and a market cap exceeding the big banks. As details began to emerge about Valeant’s less than optimal business model and the severe debt the company was accruing, the stock shed upwards of 90% of its value, wiping out billions in invested funds.

The company has since replaced the former CEO with Joseph Papa, a veteran of the industry who has proved invaluable in Valeant’s attempted turn around. Valeant also installed Paul Herendeen as CFO; this was not entirely unexpected as alleged questionable accounting practices came to light under the former regime.

With a new team, Valeant proceeded to make commitments to define a more stable business model that will keep the company profitable for years to come and established a plan to handle the staggering US$30 billion in debt.

The stable business model involved setting up a more viable distribution network and ceasing new acquisitions, at least temporarily. To combat the mountain of debt, Valeant announced the sale of some of the company’s non-core assets earlier this year, targeting debt maturities over the next two years.

Valeant has a debt-reduction target of US$5 billion to meet by next February, and given the progress that has been made, the company should meet that goal provided that asset sales do not cannibalize future sales too much.

In short, Valeant has been doing everything that it can possibly do.

So, why did Valeant drop this time?

The drop was less about Valeant and more about the industry as a whole. Weak results from Teva Pharmaceutical Industries Ltd. had a ripple effect on competitors, Valeant included. Speculation over equally weak results from Valeant and others fueled a sale, and given Valeant’s already shaky status, it didn’t take much to drive the beaten stock further down.

If Valeant were to report better-than-expected results, it could have the opposite effect and send the stock soaring. A growing number of pundits now see this as a more probable outcome, noting that the stock could surge on better results.

There are a few reasons why this could happen.

First, management has already carved up a more realistic guidance to aim for which is lower than the previous one.

Second, Valeant has, so far, made good on calls to slash debt by offloading non-core assets. While the company still has a massive amount of debt, the situation is not as dire as it was a year ago, and a growing sentiment around the stock is taking shape. Keep in mind that Papa noted that Valeant’s goal was not to be debt-free, but rather to decrease the debt to a more manageable level of US$15-20 billion. The company is even beginning to appear on the radar of hedge fund investors. John Paulson’s firm recently upped his firm’s take to 6.3% of outstanding shares.

In my opinion, Valeant is still a little too risky of an investment for most investors, but the company is definitely heading towards a great recovery.

Valeant is set to provide a quarterly update this week.

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Fool contributor Demetris Afxentiou has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

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