Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock surged more than 9% to as high as $29.15 after analysts at Morgan Stanley upgraded it from Equal-Weight to Overweight. They also raised their price target from $33 to $42 per share, saying that although the drug maker still does face some risks, they believe the upside skew is “attractive.”

Valeant Pharmaceuticals Intl Inc (VRX)

New Valeant Pharmaceuticals CEO outlines vision

Analyst David Risinger and team said in their August 17 report that after Valeant’s second quarter earnings call, they now have a better understanding of CEO Joe Papa’s plans to turn things around and enhance the company’s “financial prospects.” They believe Valeant management will be successful in renegotiating the company’s debt covenants ” for a small amount.” They estimate about $60 million in additional interest expenses per year.

They also believe management will be able to boost the drug maker’s operating income and cash flow while also paying down debt. The Morgan Stanley team highlighted that the deleverage should result in “significant” accretion to the company’s equity value.

Major boost expected in Valeant’s stock price

They expect the improvements to raise Valeant’s enterprise value from about $39 billion currently to about $44 billion. This would push the company’s share price up by 58%. Risinger and team believe that even if Valeant’s enterprise value remains the same, they expect the deleveraging to result in accretion for its equity value.

They explained that if Valeant Pharmaceuticals’ enterprise value stays the same, every $2 billion in organic free cash flow could raise its $9.3 billion equity value by more than 20%. They’re estimating four-year cash flow, including all of next year through the end of 2020, of $9 billion, net about $2 billion in outflows in connection with litigation and investigations. They’re also estimating capital expenditures of $1 billion and $1 billion in “contingent consideration.”

Risks for Valeant Pharmaceuticals

The Morgan Stanley team also lists the major risks they see to investing in Valeant Pharmaceuticals right now, but they emphasize that they believe these risks are already mostly discounted in the drug maker’s stock.

One risk is to its non-GAAP EBITDA, which increased sequentially from $1 billion in the first quarter to $1.1 billion in the second quarter. They expect this metric to expand, although some of the company’s high-profit drugs, including Isuprel and Nitropress, will see generic competition in the next six to 12 months. However, they believe this pressure will be more than offset by growth franchises and its improved cost efficiencies.

Of course risks associated with Valeant’s debt covenants remain, but as already outlined, they believe current management will be able to successful renegotiate them. They also believe the drug maker will be able to pay off more than $5 billion of its debt over the next year.

Valeant Pharmaceuticals also faces great risks related to fines as it deals with many lawsuits and probes. Analysts from other firms also warned recently that the company might not be able to meet its guidance.