Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has begun a turnaround. The Laval, Canada-based drug manufacturer is on a growth path again after VRX stock came crashing from lofty highs. A new CEO now works to drive profits and reduce a heavy debt burden.

Now, with consistent profitability predicted for the foreseeable future, an investment in Valeant stock could bring outsized returns—for investors with a high level of risk tolerance.

Long-term investors in VRX stock have experienced both high stock prices and severe downturns. Under former CEO J. Michael Pearson, the company made key acquisitions that took its stock price to almost $260 per share.

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A Securities and Exchange Commission (SEC) investigation resulting from price hikes and the use of a specialty pharmacy then sent the stock price steeply downward. With SEC scrutiny and high debt levels, the stock price fell by about 90% as many feared bankruptcy.

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A VRX Stock Turnaround Has Begun

With losses mounting, the company replaced Pearson with Joseph Papa as CEO in 2016. Under Papa, Valeant stock initially fell below $10 per share. Then, VRX stock recovered as the benefits of his actions began taking hold.

VRX has refinanced debts, pushing debt maturities further out into the future. It has sold assets, including its popular L’Oréal skincare line. While Valeant will likely retain ownership of its valuable Bausch & Lomb brand, its eye surgery business, believed to be worth around $2 billion, might go up for sale.

It also attempted to sell Salix Pharmaceuticals in late 2016 for $10 billion. Valeant paid $14.5 billion to acquire Salix in 2015.

Debt and Intangible Assets Still a Drag on VRX Stock

However, even with the sales, debt levels remain a cause for concern. The company has steadily paid off debt over the last few quarters. However, over $26.2 billion remained as of the last quarterly earnings report. This level of debt remains dangerous when the market cap stands at around $8.2 billion.

Also concerning is the $15.5 billion in goodwill and the $16 billion in intangible assets the company carries on its balance sheet. To the company’s credit, both have steadily come down since 2016. Still, both seem excessively high, especially since goodwill itself is an intangible asset by definition. And these intangibles will have to be converted into tangible revenue before more investors rush into Valeant stock.

Profits Have Returned

Still, Valeant appears to be making more intangibles tangible. These tangible benefits have started appearing where it counts most—in earnings per share (EPS). The company has reversed losses suffered in 2015 and 2016.

Today, analysts estimate a profit of $3.85 per share for 2017 when the company releases full-year numbers. Consensus estimates forecast a modest reduction in profits for 2018 due to patent expirations. After 2018, they expect profits to grow at 15% per year for the next two years.

Another area where tangible assets will appear is in new drug releases. Though many patents will expire in 2018, the company has released new drugs into the market. Vyzulta, a new drug to treat glaucoma, is expected to produce billions in revenue for Valeant. Also, the company celebrated its launch of Siliq in 2017. Siliq is a lower-cost treatment for plaque psoriasis which performed well in longer-term trials.

Other metrics pose good news for buyers as well. The company currently trades at just over 6 times earnings. Our own Vince Martin describes this price-to-earnings (PE) ratio as “nowhere close to cheap” due to the debt level. While I disagree with Mr. Martin’s view on VRX, he’s correct in stating that Valeant stock comes with significant risks.

He also correctly points out that when considering the enterprise value to EBITDA, VRX only comes in modestly lower than more stable pharma stocks such as Gilead Sciences, Inc. (NASDAQ:GILD), Pfizer Inc. (NYSE:PFE), and Merck & Co., Inc. (NYSE:MRK).

Final Thoughts on Valeant stock

Still, if debt levels continue falling and the profit forecasts hold or increase, Valeant stock could see a lot of upside. By selling assets and reducing debts, the current management team has shown it is serious about reducing debt levels and saving the company. It also continues to release drugs such as Vyzulta and Siliq.

These drugs show potential to replace the lost revenue the company will see in 2018 from patent expirations. If one has a high tolerance for risk, filling a prescription for Valeant stock might bring good health to one’s stock portfolio.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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