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A quick reminder that Bill Ackman's worst nightmare is still very much a thing

Linette Lopez
Bill Ackman

(Bill Ackman.AP Photo/Richard Drew)
It's time to check in on a Wall Street disaster.

Valeant Pharmaceuticals will report earnings on Tuesday, and analysts up and down Wall Street remain skeptical that the company can get back on its feet after a nightmarish run.

Here's what Wells Fargo analyst David Maris wrote about it in a recent note:

"In 2017, we expect Valeant will try to distance itself from the reality of its current business and current business trends. In our experience, management teams that try to do this usually talk about being excited for non-specific things like pipeline opportunities that are a year or two away, or talk about the number of launches in a given year but not their sales potential, or talk about investing in the launches to justify larger than expected spending for the promise of unattainable peak sales at some far distant time.

"Sometimes management teams even undertake a name change to suggest that the problems that remain are not product specific, but reputational. We expect that in 2017 Valeant will attempt to refinance its debt (resulting in lower EPS), and may sell more assets but will back away from the $8 billion it previously targeted (we were recently told 'it was never a promise')."

To review: Once upon a time, Valeant's stock price was hovering around $257, and the company's biggest cheerleader, the hedge fund billionaire Bill Ackman of Pershing Square, had nothing to do but smile.

However, since accusations of accounting malfeasance and government scrutiny of Valeant's pricing practices and business model hit the company in October 2015, its stock has slid to about $16.

valeant stock chart

(Markets Insider)

The company has over $30 billion in debt, is the subject of multiple federal investigations, and needs to walk the fine line of selling assets to raise cash without destroying its own product line in the process. Meanwhile, sales are on the decline, even for Xifaxan, a drug that management expected to be a $1 billion blockbuster.

From Irina Koffler at Mizuho, who has a $9 price target on the stock:

"Lackluster asset base and pipeline also keep us concerned: We note that total milligrams of Xifaxan grew 16.5% in 2016 but this trajectory flattened to approximately 2% Y/Y growth in 4Q:16. We think the brand is slowing and the overall franchise may only sustain low single-digit growth in 2017, making it the most attractive segment within Valeant.

"Expanding into primary care doctors is not expected to halt this trend. Dermatology is also declining, and management is hoping for a boost from its pipeline that may take several years. We view Siliq for psoriasis as a dilutive asset, similar to Addyi. We are finally seeing signs of growth from Relistor but the product is too small to matter, and it sounds like Valeant may try to sell it."

We could go on. Last week, Maris published a report highlighting the fact that CEO Joe Papa hired his own son to as a product manager for Xifaxan. Maris also said that 50 people who sold gastrointestinal drugs may have left the company. Both issues should raise eyebrows for investors.

Perhaps more disconcerting, however, is that Valeant and Ackman signed an agreement to split any settlement* that would come out of an ongoing insider-trading suit filed against them 60-40, respectively.

You'll recall that this suit was filed after Ackman and Valeant's failed hostile takeover of Allergan.

Allergan shareholders, including the State Teachers Retirement System of Ohio, sued Ackman and Valeant on the basis of the Securities and Exchange Commission's Rule 14e-3. It says, basically, that if company A is planning to take over company B, anyone with knowledge of that takeover can't trade in company B once company A has started to make moves to bid for the company.

So what Ackman and Valeant need a judge, or perhaps jury, to believe is that they never really intended to make an offer for Allergan — at least that's what it was after some language was changed around by their general counsel at the time.

Ackman made $2.6 billion from the deal, meaning that a fine accompanying a guilty verdict could be equal to that amount, as it's a private class action shareholder suit.*

This is an especially bad deal for Valeant, as it got to take home only 15% of what Pershing Square made from the Allergan play.

Makes you wonder why it would agree to the 60-40 legal split in the first place.

*An earlier version of this post referred to these as legal fees. It also stated that the fine resulting from a guilty fee could be 3x Pershing and Valeant's gains. That is inaccurate, as that applies in SEC insider trading suits, not private suits.

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