Monday, April 25, 2016

Valeant's new CEO

Joe Papa has just accepted appointment as CEO of Valeant.

a. I am glad my short is mostly - not entirely covered. Joe Papa is a fabulous appointment - far better than Valeant deserved.

b. Papa has his work cut out for him. Valeant deserves to go bankrupt - and will go bankrupt unless the goodwill of bond holders and pharmaceutical payers is forthcoming. If I were auditor I would still qualify the accounts with a "going concern" qualification.

Given the treatment of stakeholders it will be hard to earn and maintain goodwill from bond holders and pharmaceutical payers. Valeant owned Philidor which was a systematic attempt to defraud pharmaceutical payers. It will take a lot of work to settle all the litigation and to get the payers to continue to pay inflated prices for Valeant drugs.

Joe Papa is far more likely than anyone I can think of to earn the goodwill of payers and bondholders and thus save Valeant.

I still think Valeant will go to bankruptcy, but I am less sure about it.

Even if Valeant files bankruptcy Papa should logically remain CEO. He will run the business better than most alternative CEO candidates.

This does not mean that I think Valeant should race back towards $100. Survivability is a long way from generating enough profit to meaningfully dint that $32 billion debt load.

Still for once I am not unremittingly bearish this company.


And here you will get me to say something I did not think I would say. If Bill Ackman was responsible in part for convincing Mr Papa to take the job then Mr Ackman has done Valeant and his investors a great service.


Anonymous said...

I like your work, but am having trouble reconciling here.
Joe Papa's MO is debt funded M&A. How does this fit VRX?
Perrigo is consumer generic, not obvious choice of expertise for specialty VRX...understand Papa's pre-PRGO background is a bit different, but still.
Under Papa PRGO successfully fought off MYL takeover only to suffer operating under performance, significant stock price decline, and now guiding to intangible impairments. ...At IG cusp with sizable debt load.
Please give us readers a bit more to chew on then you like this guy. I do not dislike Papa, but fail to see how he is the cure for VRX ailments other than he is not Pearson. That is hardly reassuring.

John Hempton said...

Pearson was operationally disengaged. You make your numbers you get promoted. PRGO is operationally much better I think.

hugs'nkisses said...

"If Bill Ackman was responsible in part for convincing Mr Papa to take the job then Mr Ackman has done Valeant and his investors a great service."

A better service to both parties would have been to have steered clear of any involvement in VRX in the first place.

Anonymous said...

From the man who produced such great insight on VRX, perhaps the dumbest commentary ever written. Lauding a CEO who just left his prior company indebted and in shambles, vociferously defended it against a takeover at twice the current stock price and also quietly played the game of jacking up generic prices to levels that would make the likes of Pearson, Schiller and the Philidor folks quite proud. Is it that you just like the name Papa because it reminds you of days gone by with your old man? Please get out of the sun,stop gushing over false idols and go back to research. VRX has a lot more in common with Perrigo than just a CEO hire.

John Watson said...

Ackman gets to join Pearson for a perp walk tomorrow in front of a Senate committee.

Anonymous said...

Ackman said previously that "We know what to do". Now he's doing it. Ackman is one of the most persistent people alive, he will not give up until VRX has made a full comeback. John, it's honestly wise to get long here for the ride back up. You may have missed the absolute bottom of $26, but $35 is still pretty darn cheap IMO (under 5X expected NTM operating cash flow). Lawsuits / investigations will be settled or fade away over time. Why not take the opportunity to coattail ride Ackman? Isn't success the best revenge? GL.

Anonymous said...

John, you have been so right for so long on this one that it is odd to see you dialing back simply based on a new CEO apoointment. While you still stuck to your bankruptcy prediction, you seem oddly uncertain.. This is odd because it is quite clear that regardless of whether Papa is good or bad, Valeant is so badly damaged,and riddled by such enormous problems, that even a superhero CEO can't make an immediate difference.

What is clear is that the whole Board shoudl have resigned en masse, as shoudl the executive suite. It is also pretty obvious that there is going to be very bad news indeed on goodwill when the 10K comes out, and that there will also be more bad news in the coming months as the many years of Pearson shell games are unwound. Operating earnings will go down, down, down -- that much was pretty damn clear even in the Senate testimony, with Bill Ackman cratering on pricing strategy openly and with the rest of the company now well-policed and dominated by fear.

I think we can expect to see Valeant stock nearer to its lows (25) than at 50 in the near term. There is more bad news to come out, and Mr. Papa will want it all to come out while he can still blame the previous regime.

John, maybe at 15 if they have put out a lot of information would VRX become a buy. But now? What has changed, actually? Do we have a full picture? Not yet.

Anonymous said...

Valeant will go bankrupt, just like Ocwen, Sears, Blackberry and Nokia
always unfounded shock statements

Anonymous said...

Great. Well there's a mini-Valeant inside PRGO. PRGO has jacked up the prices of their dermatology drugs (majority of the Rx division) a ton over the last 3-4 years. The Rx division earns massive margins and has driven more than its share of growth. It currently contributes 1/3 of profits, after having been cut severely (coincidentally) just after Papa's well timed exit.

Sounds like the perfect skill set for VRX!

mergerpie said...

Papa had screwed the shareholders of Perrigo by rejecting Mylan's merger back in Sep 2015 and then left them holding the bag with Perrigo in tatters! This is a CEO who thinks more for himself rather than his shareholders. Just my humble opinion.

Anonymous said...

John, do you still think you will be going bankrupt?

John Hempton said...

yes, still a zero

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