Is Valeant Canada's next Nortel?

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In the wake of his debut performance at Valeant Pharmaceuticals International Inc., we now know how freshly minted CEO Joseph Papa plans to turn around the troubled drug company. Coming out of Tuesday's annual meeting, the question is can Mr. Papa pull it off?

Recent corporate history offers a guide to Valeant's fate and it's not pretty.

The best-case scenario for Valeant shareholders: The company follows the path of General Electric, post-Jack Welch and 2008 financial crisis, with Mr. Papa executing a shareholder-friendly restructuring by focusing a sprawling business.

The worst case: Valeant is the next Nortel, retracing an arc from corporate hero to zero as a new CEO proves unable to recover from the previous regime's takeover binge, scandals and massive debt.

Ominously, a review of the challenges facing Mr. Papa shows Valeant has a whole lot more in common with the fallen Canadian tech giant than the slimmed-down U.S. industrial juggernaut.

The relevant comparison between Valeant and GE is that both companies' stocks enjoyed lofty valuations when their CEOs were implementing roll-up growth strategies. Valeant and GE used their high price-to-earnings multiple shares as currency to acquire disparate businesses. Both stocks shed that stunning P/E ratio when new bosses arrived and unrolled the roll-ups.

Today, GE's share price is still only half what it was 15 years ago, when the legendary Mr. Welch retired. For those who bought Valeant shares near their peak last year – hello, Pershing Square – the takeaway from GE is that you can wait in vain for a stock to return to its glory days.

Aside from parallel paths on valuation, GE's restructuring offers few lessons for Valeant. Current GE CEO Jeff Immelt has spent his entire career at the company and consistently operated from a position of strength as he honed operations. Valeant's CEO has been around less than two months and has walked into a burning house.

The decline and fall of Nortel offers a grim but more realistic road map for what may be coming at Valeant.

Recall that a decade back, a CEO with proven turnaround credentials was parachuted into a troubled company that had once been Canada's largest by market capitalization. While he never lacked in swagger over three years at the helm, Nortel's Mike Zafirovski failed to overcome the problems he inherited, a list of woes that is all too familiar to Valeant investors: debt, lawsuits, regulatory scrutiny and an unfocused growth strategy. Nortel filed for creditor protection in 2009; creditors sold off the carcass.

Mr. Papa exuded confidence Tuesday as he presented his plans for fixing Valeant's well-documented problems. A pharmacist by training, he reminded the crowd that he's fixed busted companies over his three decades in the industry.

But Mr. Papa's PowerPoint slides spoke to the depth of Valeant's issues. The CEO's priorities include "re-recruiting" employees, who are understandably traumatized, re-forging relationships with patients, doctors and insurers who are steaming over past drug price hikes, seeking "expedited resolution" to regulatory probes and selling off businesses acquired by predecessor Mike Pearson to pay down a daunting $31.3-billion (U.S.) debt.

Valeant's short-term goals are relatively modest, as the new CEO clearly wants to underpromise and overdeliver. Mr. Papa told shareholders that Valeant's focus is now on drugs for eyes, skin and gut, or as he put it, ophthalmic, dermatology, gastrointestinal and consumer products. He pledged he'll raise $1.7-billion this year, cash earmarked for paying debt, and he committed to research and development as a source of future revenue, a break with Mr. Pearson's practice of goosing short-term results by slashing spending on innovation.

Longer term, Mr. Papa faces the challenge of boosting Valeant's revenues and cash flow without the ability to pull two levers used by his predecessor: Acquiring drugs and jacking up their price. The company must both settle with regulators – estimates on the size of that bill run to $5-billion – and pay down loans – Wells Fargo estimates $15-billion of debt comes due by 2020 and "based on this quarter's cash from operations, we do not see debt holders being enthusiastic about restructuring Valeant debt."

The business model that built Valeant is in tatters. The new CEO has bravely unveiled his strategy for fixing a busted company. Down the road, Mr. Papa and Valeant investors should be thrilled if a GE-style turnaround results from the plans announced at Tuesday's annual meeting. But the wrenching fate of Nortel seems the far more likely outcome.