Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is a difficult stock to value. Unlike a ‘regular’ company with a stock price reflecting cash flow, EPS, or top line growth, Valeant’s stock price seems to be determined by its probability of not going bankrupt. And while Valeant’s assets would have tremendous value as standalone entities, the roll up itself reduces the value of these assets because of its heavy debt load and existential risk.

The good news is that Valeant’s new management team is superb, and even a bearish observer can admit this. Within months of becoming CFO, Paul Herendeen completely transformed Valeant’s near-term debt situation and provided the company’s first guidance upgrade in recent memory. But how much of Valeant’s May rally is really justified, and can it hold for the rest of 2017?

Is the Post Earnings Rally Justified?

Bullish sentiment has kept Valeant’s stock holding above $10 for almost the entire month of May. Much of this strength is due to unexpectedly not-as-bad-as-expected earnings reported at the beginning of the month. Earnings revealed a significantly improved debt situation and a guidance upgrade. But while this pushes back the near-term risk of default, it does little to change the businesses’ deteriorating condition.

In the first quarter, Valeant’s revenue declined from $2,372M to $2,109M – an 11% drop year-on-year. Adjusted gross profit fell from $1,774M to $1,513M. And adjusted EBITDA – the most important metric for debt coverage – fell 15% to $861M for the quarter.

The problem is that this deterioration will continue for the rest of the year, and Valeant’s growth drivers (Siliq, Addyi, and others) are only expected to provide an extra $100M to the company’s annual top line. This is simply not enough to negate the declines. Remember, $100M is only $25M per quarter if divided evenly. Most of this extra $25M per quarter will probably come from Siliq.

Valeant bought Siliq (then Brodaulmab) for $100M upfront from AstraZeneca and then was obligated to fork up an additional $170 million upon approval of the drug. Only a small fraction of Siliq’s revenue will become EBITDA, and the two companies will share profits.

So yes, while Valeant’s debt situation has improved substantially, and the fear of bankruptcy has been pushed down the road, Valeant is still a declining company. And it is unclear how much more decline the market will tolerate before the stock price collapses.

In fact, not only will the declines continue, but they will probably intensify. Remember, Valeant’s first quarter included an extra $81M from Dendreon – an asset scheduled to be divested by the end of the year. To make matters worse, Valeant appears to have streamlined R&D and selling expenses for the Branded Rx division, meaning revenue declines in this segment will have an outsized impact on EBITDA.

Conclusion

Valeant’s stock has performed well in May due to impressive managing of the debt. However, while Valeant’s stock is being supported by a lower risk of bankruptcy, the company still faces freefalling revenue and EBITDA. Management has given no convincing details on how they plan to stop the business from declining, and even if they had a plan, they would probably lack the cash flow to pull it off with so much capital being earmarked for interest expense and debt reduction.