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Dim Prospects for Valeant Pharmaceuticals as Former CEOs Face Criminal Probes

By Motley Fool Staff – Nov 14, 2016 at 5:30PM

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Once the biggest publicly traded company in Canada, the drugmaker has suffered a series of major setbacks regarding its business model, pricing tactics, and accounting methods.

In this segment from Market Foolery, Chris Hill is joined by Bill Barker and Jim Gillies as they consider the growing challenges at Valeant Pharmaceuticals (BHC 1.66%), which has seen scandal after scandal tank its stock price and reputation. The question remains: Does Valeant still have value, or a future, as a public company.

A full transcript follows the video.

This podcast was recorded on Nov. 1, 2016.

Chris Hill: Let's start with, in honor of Jim Gillies, as though this were timed, Valeant Pharmaceuticals. Once upon a time, the largest public company in Canada, which, as you pointed out on a previous episode of Market Foolery, that's kind of the ...

Jim Gillies: As soon as you hear that.

Hill: That's the death knell for any public company in Canada.

Gillies: That's not a bank.

Hill: That's not a bank.

Gillies: Yeah.

Hill: If you're the No. 1, you're the biggest public company, it's time to short that stock.

Gillies: Yeah, titles previously held by Nortel, Research in Motion, and BRIUS.

Barker: Who is it now?

Gillies: It's back to being Royal Bank of Canada.

Hill: Valeant Pharmaceuticals, former CEO Micheal Pearson, and former CFO Howard Schiller are the subjects, not of a soon-to-be released biopic film. No, they're the subjects of a U.S. criminal probe, proving once again that the market's reaction may be the best indicator of how to view this news. Shares of Valeant up a little bit on this.

Gillies: They were down a lot more yesterday, when this news started filtering out.

Hill: Where is this company going? Is this company in any legitimate danger of going away altogether, or when you look at this company, do you think there is value here, that they need an entirely fresh start, if at all possible, and there is a way forward for this company?

Gillies: That's a lot of questions, it's a big question, and it's a company that I have, frankly, not had the greatest love for, so I'm kind of tainting myself here when I say I've never liked the company, never got the story, watched with dismay as it was a multi-bagger before, of course, crashing down 90%.

I think their debt load, they've got 30-odd billion dollars in debt. That is going to necessitate the company as going to need to change. I think they're currently trying to figure out ways.

The new CEO came over from, I think his name is Joseph Papa, from Perrigo or somewhere, another company. He's trying to revamp the company. Bill Ackman, the activist investor, who was now former CEO, disgraced CEO Mike Pearson's bestest buddy for a while there before forgetting his name.

They're trying to right the ship, and I don't think that Valeant in its present form can survive. I think it's another case of a lesson of when you are trying to gain the system where the party on the other side of the transactions that you are affecting is a large, powerful entity called United States government.

In a lot of cases, this was basically -- they were jacking the prices on the drugs, and the ultimate payer is the government, who has pushed back. I think for other examples of that particular phenomena, you can look at the for-profit educators, which have largely been run out of business or otherwise decimated.

I think that when you get into that situation, you probably should expect the government to push back and push back hard. If you have been doing things of a quasi-legal nature, which is certainly the suggestion of what's going on now with Valeant, you should probably expect to take the probes that Mr. Pearson and Mr. Schiller are currently experiencing.

Hill: Thank you for reminding me that Bill Ackman is still involved in Valeant Pharmaceuticals.

Gillies: He's on the board.

Hill: As a Chipotle shareholder, I was worried that he was going to be spending a lot of time trying to...

Gillies: Fix Chipotle?

Hill: ... exert influence at Chipotle. It's nice to know that he has other fires he's trying to put out.

Bill Barker, what about you? When you look at Valeant Pharmaceuticals, is there anything ... I mean, this is, for those unfamiliar, this is an untraditional pharmaceutical company in that typically, pharmaceutical companies are plowing a lot of money into research, looking for that next blockbuster drug. Valeant's path to growth was almost entirely through acquisition, so I'm just curious what you see when you look at Valeant.

Bill Barker: I am just reminded of the Oscar-nominated song from South Park, "Blame Canada".

Gillies: It was an Oscar-nominated song?

Hill: It was.

Barker: Yeah. That's about as much as I have on this one. I think that ...

Gillies: You cannot blame Canada for this, this was an inversion of an American company.

Barker: I can blame Canada.

Hill: Have you met him? Of course ...

Barker: I can blame Canada. You're just dodging it. After promoting this company all those years, like you and every other Canadian, and now it's going to take the good and hard work of U.S. regulators ...

Gillies: Criminal prosecutors.

Barker: ... and criminal prosecutors to bring one of the many Canadian criminals to justice. If only we had enough time to get the rest of them, is my feeling.

Bill Barker has no position in any stocks mentioned. Chris Hill owns shares of Chipotle Mexican Grill. Jim Gillies owns shares of Chipotle Mexican Grill. Jim Gillies has the following options: short January 2017 $82 calls on Royal Bank of Canada. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Valeant Pharmaceuticals. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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