Would I invest in Valeant (VRX) after Joe Papa discussed his plan to get the company stabilized and growing again, when I interviewed him on Mad Money? Papa, who has just arrived, didn't have enough meat on the bones of his plan, but he hasn't really had much of a chance to dig in yet.
But you have to wonder if there is enough that's investible, let alone justify any business plan, after drug price cuts and rollbacks, more research and development spend -- the average "real" pharma spends about five times what Valeant does on R&D -- and the debt payments on the more than $30 billion that's owed.
I wish I had more comfort about anything involving Valeant. I know, for example, that it did have free cash flow of almost $2 billion in fiscal year 2015. But let's say that it had to roll back prices on its most profitable drugs, something Joe suggested could happen. Then let's say he took the research and development budget up to where the major pharmaceutical companies have theirs. Then let's say that the large numbers of drugs that are about to go off-patent have generic challengers ready, so that the current pricing of non-roll-backed drugs can't be withstood.
Then it is possible, totally back of the envelope -- which is about as good as anything when it comes to Valeant -- that the cash flow would be reduced to nothing. You can literally come up with expense increases and declines in sales that easily wipe out that $2 billion ¿ easily -- if the company were to be run like Merck (MRK) of Dividend Stock Advisor portfolio holding Pfizer (PFE). And that's with the foreign tax regime.
At the same time, I have to believe that Papa did enough due diligence to see that the cash flow was real and wouldn't be drained by the debt service, or he wouldn't have left Perrigo (PRGO).
Now, it is true that critics are saying that he had to leave Perrigo given the sudden decline in sales and the problems with the $4.5 billion Omega acquisition. Believe me, I understand the anger here. Perrigo was in the $150s when Papa came on Mad Money last year to urge shareholders not to sell out to Mylan's (MYL) bid. Ultimately, the stock did climb 50 points after that, but now it sits in the $90s, way lower than the $160 in cash and stock that Mylan was offering.
It was a bad time to exit for the suffering shareholders he left behind. I asked that. It didn't seem to play a role in his decision-making to leave the firm to go to Valeant, because he left it in good hands. We'll have to see.
Instead, Papa focused on how he had done his due diligence and there was enough in the pipe -- his major emphasis -- and enough non-core assets that could be sold and enough solid sales of good drugs that gave him comfort that the challenge was worth it to try to save the company.
Let me say this: I do not think Valeant is a "corrupt" company. I think Valeant did what you were allowed to do, in the extreme: game the system, take up prices where you can, and get away with it because there's no real authority that can say "you can't do this anymore."
I question how different Valeant really was from other companies in the industry, other than it being more aggressive in buying companies and having a lower tax regime and being more forceful in putting through big price increases.
The industry is not filled with saints.
Still, though, here's my bottom line: I think ultimately Valeant is not about what Joe Papa saw when he decided to come in. I think it is about what Valeant's competitors can do to a Valeant in disarray. We hear about the 22,000 hardworking people who toil at Valeant. But how about all of the hardworking people at Alcon, owned by Novartis (NVS), or The Cooper Companies (COO), or Acuvue by Johnson & Johnson (JNJ)? Do you think that these companies are standing still while Valeant's Bausch & Lomb tries to keep it together?
Do you think that Action Alerts PLUS charity portfolio holding Allergan's (AGN) derma business is sitting still as Valeant's Medicis business tries to keep it together?
You think Salix is still worth the $11 billion Valeant paid for it last year? Do you think its gastro business has gotten that much better?
In other words, maybe it's not up to Valeant, whether Papa runs it or not. Maybe it is up to the sharks in the waters Valeant plays in.
Can it bounce? Sure.
Should it bounce?
Do I want to play the bounce?
I don't think anyone's really that good. But I know this: the world is gunning for this company.
And Joe Papa can't stop the world. I don't know if anyone can.