The short seller who bet big against Valeant has turned bullish on the company he helped bring down

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The U.S. short-seller who helped take down Valeant Pharmaceuticals International Inc. has turned bullish on the company that emerged from the debacle – Bausch Health Cos. Inc.

Andrew Left, the Los Angeles-based founder of Citron Research, said Bausch has undergone a “textbook turnaround” in the years since allegations of fraud and price gouging triggered Valeant’s spectacular fall.

“The new Bausch Health is not Valeant,” Mr. Left said in a report released Tuesday.

“During the past four years we have observed [Bausch] with a healthy dose of skepticism and questioned whether management could turn things around. We have to give credit where credit is due.”

Mr. Left confirmed he has a long position in the stock, which rose by 3.4 per cent on the Toronto Stock Exchange on Tuesday.

But Bausch is still a tough sell for many Canadian investors, and not just because so many of them got burned when Valeant’s share price collapsed.

While Bausch has made strides in reducing its debt, the company still has more than US$24-billion in long-term debt on its balance sheet.

“That’s going to hang over them for a long, long time,” said Jason Del Vicario, a portfolio manager at HollisWealth, a division of Industrial Alliance Securities.

A heavy debt burden is just one of the ways the reformed and restructured company is still struggling to free itself from Valeant’s legacy.

In 2015, Valeant was one of the biggest stories on Bay Street. Through a relentless campaign of growth through acquisitions fuelled by debt, Valeant briefly surpassed Royal Bank of Canada to become the country’s single largest publicly traded company, with a market capitalization of nearly $120-billion.

Mr. Left emerged as one of Valeant’s most vocal critics in October, 2015, when he revealed a short position and released a report calling the company a “pharmaceutical Enron.” Valeant’s shares fell by as much as 39 per cent that day alone.

Within five months, the stock had lost 90 per cent of its value from its peak, and it has mostly traded sideways since.

“Four years later [Bausch] still trades with a ‘Valeant discount’ despite new management’s 180-degree turn of corporate culture,” Mr. Left wrote. It’s time for the Street to give the company another look, he added.

Bausch has posted two consecutive quarters of growth in earnings before interest, taxes, depreciation and amortization (EBITDA) and six consecutive quarters of organic growth, the report said, suggesting the stock is “on its way” to US$40, which would represent an 87-per-cent gain from Tuesday’s closing price.

The company is poised to “pivot to offence,” with a particular focus on its “crown jewel” Bausch & Lomb eye-care assets, Mr. Left said.

And with no significant maturities before 2023, the company has some breathing room, its debt finally “manageable,” he said.

Still not quite manageable enough for some, however.

Mr. Del Vicario generally looks for a ratio of net debt to EBITDA below 3 to 1, while Bausch’s is closer to 7 to 1.

With that kind of debt, “you’re not really the master of your own destiny, you’re at the mercy of your lenders, and interest rates,” Mr. Del Vicario said.

High debt burdens can be more palatable with companies posting higher rates of growth, said Jamie Murray, head of research at Murray Wealth Group. But Bausch’s revenue is forecast to grow by just 2 per cent to 3 per cent annually over the next five years.

“We like growth and we like strong balance sheets,” Mr. Murray said. “Right now, Bausch doesn’t have either of those.”

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