Transcripts For CNBC Fast Money Halftime Report 20160502

Son to grow up and run a company in the manner that valeant was run. How do you respond . We made a lot of changes in the last few weeks. I have been on the board for about five weeks. We have a new ceo, joe papa, who is starting today. Today is his First Official day. Appropriate i should be on your show. The companys made some mistakes but i think where charlie is wrong, hes wrong to indict an entire company on the basis of a few mistakes and a leader that is no longer with the business now. And the 22,000 people work for this company, i think this is a Great Company. When you look at the one of the things i was sort of thinking about to give you a sense of context, think about when berkshire invested in Goldman Sachs. Goldman sachs had to be one of the most reviled companies in the country, accused of all kinds of bad subprime, misleading investors, every day another negative article. Feels like this is the same moment for valeant. It didnt stop buffett from making an investment in the company. Goldman paid a lot of fines. I have enormous respect for lloyd blankfein. They owned up to their mistakes, made appropriate changes in personnel and the company companies. You dont indict Goldman Sachs on the actions of a few people or valeant on the actions of a few people. There were issues with the Business Model, no . Sure. Fortunately its a small part of the business. The drugs in question, less than 5 of the revenue of the company. The strategy in question which is not something we approve of, 13 of the business was buying old drugs and marking the prices to market. They had a justification for it. Im not going to defend it. If you think about the balance of the business, baush and lomb is one of the greatest ophthalmology companies in the business. You have middle east, eastern europe, asia, all over the world, south america has been extremely successful. You have a company they acquired last year which makes a lifesaving drug, drug that makes people more comfortable every day. The Company Makes a lot of very good products. I met many of the employees. These are hardworking people. Their offices are not so far, the u. S. Office is not so far from where we are. The company is not a sewer. Neither is Goldman Sachs. Did Goldman Sachs make mistakes . Did bank of america make mistakes . Of course they did. But you dont indict all the employees. Buffett said you should have been able to see or could have been able to see the problems at valeant from a mile away. You said before Congress Last week there were things you didnt understand about the business that you wish you had done better Due Diligence. You called it a failure of Due Diligence on your part. You called some of the practices horrible and wrong. I think its wrong to buy a drug and mark the price up 5x even if the therapeutic value of the drug, in their mind they marked it to market. They hired a consultant, the consultant looked at alternative products and the therapeutic value and said this is an underpriced drug, this is an opportunity. If this were a Specialty Chemical Company and they bought, we own platform specialty products, the platform bought a chemical used in Industrial Production and a comparable chemical was 6x the price and they bought a chemical and marked it up, no one would make issue of it. What valeant forgot is this is a product that is used to save peoples lives and theres a social contract a drug company has with patients and the hospitals it serves. My point is you knew what the Business Model was before you made the investment. Even though you say you wish you did better Due Diligence. You still made the investment. Let me be clear. Valeants Business Model, again, the whole media thing, small portion of the business. If you think about baush, they sell products to walmart. Theres no marking up the prices of drugs in their Business Model. In emerging markets, when they sell pharmaceuticals theres no marking up the price. The salex asset they bought, they havent meaningfully changed the price of the products. There was a subset we didnt assign a lot of value to, buying tail products, products about to go off patent. They have 12 or eight months to go. It is a common practice in the industry whether or not you like it. Pfizer does it and other Big Pharmaceutical Companies do it. They mark up drug prices right before they go off patent because theres a Generic Product coming in and the paiyes allow it to happen. That will come under a lot of scrutiny. Because its a very short stream of cash flow, when valeant marked up a price of a drug that went off patent a few months later, they squeezed a little bit of value out of it before it went off patent. Its a practice that is not a Good Practice but its not something as part of our Due Diligence we assign a lot of value to. We looked at a Company North of 20 p. E. When it was an independent public company, we looked at the branded generics business, they sell for 15 or 20 times ebitda when they trade on the public market. Our bad for not focusing on this practice. The drugs in question, the prices were marked up after we made our investment. You said you regret not selling the stock when it got around or above 200. You said that in your annual letter. Any price would be better than the current price. Do you regret even owning the stock . Do you regret the investment to begin with . Of course. Of course. No one wants to have an investment down 85 or 90 . I had to spend a lot of brain damage in the last five weeks working with the board to fix the problem. I think in a very short period of time we helped do a lot for the company. We were invited to join the board, i joined the board march 21st, that weekend. We did a number of important things. We announced we would be launching a search for a new ceo, announced the status of the companys Ad Hoc Committee process. I along with bob ingram and by the way, he has been chairman of the board since i have been a member of the board, is an outstanding director. What you will find on this board even though this company made mistakes is a group of outstanding people that presided over some mistakes. It happens. I worked with bob and the other members of the Search Committee and found an outstanding ceo. How close did you come to getting out of valeant completely rather than getting further in, some with say, by joining the board . Very close. We thought very very seriously about it. At Prices Higher than current prices. We decided the value of the assets is much greater than the stock trades and this would be an opportunity. We also thought we could fix it. I think we made huge progress in the last five weeks. We have actually, this is also to the credit of the current board. Some article, i read recently, sort of claimed i threw a bunch of directors off the board. Totally false. The directors here did something you dont see very often. They said we made a lot of progress, we have been on the board for a period of time, its time for a fresh start and im not going to put my name in at the upcoming annual meeting which is something you dont see directors do. You had to have a lot of influence in those changes, whether you were directly responsible for in your words, throwing these people we had a lot of influence, i worked very hard to help recruit a talented ceo and joe papa was our first choice candidate. I think for many reasons he will be outstanding for the company. The rest of the board, the chair of the Audit Committee, i have never seen a director work harder, you can imagine what was required to get this 10k filed and how many, 24 7 days not just of management, but even the Audit Committee has done a ton of work here. Not surprisingly, folks obviously knew you were coming on today, a note from an analyst hit this morning which says despite everything thats happened the 10k is filed, you have a new ceo, that sentiment remains cautious. Company still has 30 billion in debt. Has in many ways become the poster child of drug pricing in the president ial campaign and is likely to remain that way for months to come. Some say the stock is uninvestable. How do you convince them its not . Its not my job to convince them. I do think up until friday, for many people, it was uninvestable. When they announced on the Conference Call a month or so ago, march 15, that they werent sure when the 10k would be filed, the stock dropped 50 within minutes of that statement. Why . Because many investors are not permitted to own a stock without current financial statements. You think about 10k the company just filed. I would say this is the most highly scrutinized 10k perhaps in the history of price waterhouse. We had deloitte and touch working with an Ad Hoc Committee of the board, looking at every accusation against the company, looking at inventory, accounting issues. Fortunately we were correct on this. This is not some massive accounting fraud at the company. There was a revenue recognition issue thats been acknowledged but i think now 10k is filed, you now have numbers you can rely on and be comfortable with. The company was uninvestable because people werent sure who would be running the business going forward. We established that today. Joe papa is now ceo of the company. I think hes got a long term, 35 year track record in the industry of excellence. Not that he hasnt made some mistakes. He made a mistake with an acquisition. I frankly like that. The problem with the ceo that never makes mistakes, the mistake will be a big one. I think whats been forgotten here is valuation. This is probably the cheapest Large Company i have seen in my career in terms of value relative to the cash the business will generate. We think valeant will generate meaningful, take a look at the companys published numbers, 6 billion ebitda for the next months, even if you haircut the number, this is plenty of capital to service the debt. Company doesnt pay a lot of taxes. As a result, that debt gets amortized quickly. There will be an Investment Grade Balance Sheet within the next two, three years without selling one asset. In some respects, you are making the case that it is investable. I know steve weiss has a question. If you are a Health Care Investor going to big pharma or a company like this, and you are seeing the Business Model has to change because while only 13 of the business you say has been priced, actually if you look at all last eight quarters, price has exceeded volume in terms of bringing in the revenues. Im looking at other companies that had Investment Grade ratings now that arent that much more expensive than a p. E. Basis but giving 3 or 4 dividend. Why buy valeant instead of one of those . Not sure which companies youre referring to. Next 12 months trading at three times earnings. You have to change the model to get there. No, no, no. No, no, no. The numbers the company put out today is not the projections for the next 12 months that were put out on the call on march 15th reflect the meaningful price concessions the company has taken, reflect the 30 reduction and also the company not raising price over the course of the year. I think three times earnings, a lot of bad things can happen. You can still make a lot of money. Also, three times earnings and a levered Balance Sheet. I did go through the 10k. I had to read through it a four times. 46 of the revenues come from, as most companies, pbms that are getting even more conscious on price compression. Again, the numbers reflect deals the company has made with those pbms. I think in the numbers, its in the numbers already. You couldnt ask for a company with more negative sentiment but the time to invest is pretty much when everyone thinks this is a bad idea. I do think many investors waiting until the 10k is filed, waiting until you know who the new ceo is, waiting until you see who the new board is, these are things worth waiting for. But this is an incredibly undervalued business. The big concern when we cite the fact there are good drugs at the company which i dont think anyone would dispute, the crown jewels may have to be sold. Maybe not yet. If they are sold, probably not anywhere near what they were paid for. Baush being one example. Not the case. We dont have to sell one asset to meet obligations to creditors. Is it likely it would make sense to get rid of the 30 billion debt load . No. Absolutely not. In terms of asset sales the company has no plans to sell any crown jewel type assets. The only things we are considering are noncore asset sales and here, there are assets in the company that have meaningful value that dont generate a lot of cash, perhaps lose money. Pearson bought a lot of assets over a long period of time. Those would be first on the list. In terms of the core franchises of the business, these are not things we are considering selling. If someone walked in and offered a massive price for something, its a public company. By the way, the phone has been ringing off the hook from other Pharma Companies interested in lots of different pieces of the company. But we think best thing for the company to do right now, we have a great ceo, we need to run the business, we need to put up a few quarters of results and you will see meaningful change in the value of the company. Let me ask about mr. Papa. You clearly made the case hes the right guy. Why is he the right one to be the guy . First, i encourage you at some point, im sure he will want to come on. This is his first day. If you talk to people who invested with him over a long period of time, look at track record. 35 years in the industry, all aspects of the industry. Generics, otc business. Spent a meaningful part of his career and branded pharmaceuticals, prescription pharmaceuticals, worked in wholesale and distribution. Every element of the business. Think about perigo, it has very good relationships with various forms of distribution of pharma with payers and otherwise. Hes a very experienced executive and also a very calm, lowkey, stable super High Integrity person. When i asked someone else, i was doing Due Diligence on joe, someone i highly respect in the industry, everyone loves joe. Hes a very likeable guy. People have enormous respect for him. Totally nonpromotional. Exactly the person you want to bring into a situation like this. Let me ask you another question. His pay package has drawn some criticism. He will make 67 million but if the stock hits 270 a share, he will get a pay package and stock equivalent of 500 million. 270 is about 10x the current. I would give it to him. My point is, doesnt that incentivize him to do some of the same things that mr. Pearson was criticized . No. Senator collins calls the pay structure of mr. Papa quote, outrageous. First of all, unfortunately, when you read the story in the media they dont often get it right. Let me tell you what we did and the thoughts behind it. So we gave him several things. He makes a million and a half base. Theres a bonus opportunity of a million and three quarters. Its a lot of money by most peoples standards but for the ceo of a company this size, its certainly probably on the low side in terms much how executives are paid. In addition, he walked away from about 20 million worth of restricted stock and other things that had already invested, will invest later this year, hes going to lose. We had to make that up to him. Make him whole. That was 20 million of the package. Okay . We gave that to him 8 million in cash and 12 million restricted stock that dop doesn invest for four years unless the Company Meets qualitative objectives like relationships with the government and patients and with the community. The big economic component of his compensation is he gets 30 million of restricted stock units. What we did for him, instead of paying him like a typical ceo, many ceos, we did the same thing we did for hunter harrison. We said youre coming into a turnaround. We think its appropriate you get paid for the value you create from this baseline. So instead of giving him 10 million in restricted stock each year for the next four years which is certainly within the range, maybe even the lower side of market compensation, we gave him the 30 million of restricted stock or performance units up front and they only vest if the Company Achieves fairly dramatic increases over time. I will get to your point in a second. But at 60, only the stock, the measuring period by the way is four years from now. So four years from now if the stock does not hit 60, he does not, performance stock units, he dont make very much. Above 60 he gets 25 of the 30 million restricted stock. At 90, he gets 50 . At 120, 75 . At 150, 100 . If he gets to 270 he gets twice the 30 million of performance units hes receiving today. In that circumstance of course the stock is up tenfold. I think the shareholders are very happy. Why doesnt it cause him to do some of the things pearson, mistakes pearson made. Number one, first of all, i enjoyed being part of the Senate Hearings. I was actually quite impressed with the whole process. I think they certainly accomplished their objectives when they asked how do we prevent this from happening going forward, i said you have already done that when you knocked the stock price down 85 from mistakes management made, many of which on the pricing side of the business, you have accomplished your objective. My point here is value in stock prices is not going to increase meaningfully if the business cash flows are being driven by price increases. First its not going to happen. Second, the markets not going to reward the company. The market is already discounting companies where prices are a meaningful part of the driver of the growth of the business. This stocks only going to go from 30 a share to 120 or 270 because we are going to build a Great Company. Going to build a company that grows based largely on volume, not based on massive price increases, that grows not because the company is making a series of acquisitions and marking up the prices of drugs, because the franchise is becoming a more and more dominant franchise over time. Because the companys productive in terms of coming up with great products that help save peoples lives. Thats whats going to cause the Pharmaceutical Company to trade at a valuation where mr. Papa makes a lot of money. He understands that. This company will be the most closely watched company in the industry. Think about the fact that you have an executive who has done a fabulous job. Hes 61 years old, 60 years old. Hes been at perigo for ten years and can retire there in four or five years and have an easy go of it or he can step into a company that theres an enormous amount of controversy around. Clearly, this is a smart guy. Clearly hes done his Due Diligence and thinks this company has fabulous assets. This is a business he can fix. We will come back. More on valeant with bill ackman plus the Hedge Fund Industry is in a catastrophic period with First Quarter outflows the highest level in seven years. Is he right . Thats ahead. Stephen king, the master of suspense and the macabre. I enjoy keeping people up at night. My Analysis Shows your stories are actually about human connection, even love. Great storytelling needs drama and empathy. My cognitive apis can help any business Better Connect with its audience. You should try writing a book. Find a remote hotel. Bring the family. I do not think that is a good idea. Bring the family. We need to be ready for my names Scott Strenfel and r im a meteorologist at pg e. We make sure that our crews as well as our customers are prepared to how weather may impact their energy. So every single day were monitoring the weather, and when storm events arise our forecast get crews out ahead of the storm to minimize any outages. During storm season we want our customers to be ready and stay safe. Learn how you can be prepared at pge. Com beprepared. Together, were building a better california. We are back with our special event on the Halftime Report. Bill ackman here live. I want to ask about mike pearson. We talked about mr. Papas pay package. Mike pearson get 143 million in 2015. Should he be embarrassed by that number . I dont know exactly i dont think that was a cash payment. That might relate to the market value of the stock he earned in previous periods. Nonetheless. Considering what happened to shareholders. Should he give some of that money back . Again, im not defending him, but his compensation package was designed in a way that i think aligns the interests with shareholders. Hes not permitted to sell stock i think until two years after he leaves the company. Maybe that stock price, wherever it was, he owns eight or ten million shares, was worth a lot of money. Down 90 , he suffered the consequences. If he made mistakes thats caused the companys market value to decline, hes borne that along with shareholders. Look, you have only been on the board for six weeks. But when you see a number like that, can you understand why people look at that and say what the heck . Absolutely. For lack of saying Something Else i cant say on tv . Lets move on. Lets talk about hedge funds. The industry that is near and dear to you and its been a tough environment. I dont have to tell you, you know that as well as anybody. You were coming off pershings worst year after. Some of your contemporaries have gone through the same troubles. Why is it so hard to make money doing what you guys do . Again, for us, we run a concentrated portfolio. Its hard for me to speak to others. This is, as i described, the bumpy road to performance, not the smooth one. The media tend to judge investors on a very short term basis. You are right if the stocks up, wrong if the stocks down in the short term and the test is a much longer run. We have done well for investors, exceeding the performance of the s p over the last 12 years even with the worst eight months in the history of the firm. I expect we will make a meaningful recovery from here. But look, as buffett says, there are the active you cant have a world of active investors where they all exceed the market. It doesnt work. There are some great hedge funds that have done extremely well, even i assume in 2015, and probably this year, and many funds are not doing nearly as well. But i really have not done the analysis. Its hard for me to answer. You go to his annual meeting every year. Yes. You ever ask him for advice when it comes to investing . I probably asked him for advice. Maybe less so when it comes to investing. Hes been an important mentor to me. As we see, im continuing to learn from mr. Buffett. Some have called you baby buffett. That was you on the cover of a mana magazine not that long ago. That was unfortunate, yes. I have a lot of respect for Warren Buffett. I dont like the notion of, im not trying to leverage off of mr. Buffetts successes. I didnt choose the title of that cover. Maybe that was very bad luck, that cover. It happened to be right before the worst period like the Sports Illustrated jinx. For sure. I want to stay off the covers going forward. What is interesting when people think about you and your investing style, you generally like to go allin. You are an allin guy. Herbalife, valiant you list the worst investments. Those are the worst ones in general. In general r, mention the go ones. What is it about you that makes you we are a concentrated investor. Our view is its hard to earn above average return owning a 1500 stock portfolio. The benefits of owning a few companies, you can invest in the best businesses you can find, get to know them extremely well and if you are an activist, an investor that again, our initial investment in valeant was passive and in retrospect, that was a mistake. Now its become a more traditional investment. We have become quite active. You need to concentrate your assets simply because one, you need to own a large stake in the companies and also weesh have a limited amount of time. Those are other factors. What drives it is concentration i think is a very important tool to drive results. We dont like using Financial Leverage to drive returns. We prefer choosing among the best businesses we can own. We own some of the greatest businesses in the world. You dont use margin. You made that point in the past. We dont use margin leverage. We use concentration in finding the best i would rather own the best ten things as opposed to the best 20. I would rather sell 11 through 20 and buy more ideas one, two and three. Dan loeb wrote in his letter to investors we are in a quote, catastrophic period for hedge funds that we are in the first inning of what he called a washout. How would you react to that . What do you think about those comments . Like many other industries theres a spectrum of success. There are top performers and underperformers. This is an industry that has a very high compensation structure. It attracts a lot of participants. The barriers to entry have not historically been that high although i would say today they have become a lot higher with the regulatory costs and costs of hiring talent and so on, so forth. There are probably too many players in the industry. Dan is probably right, the industry will probably shrink although i dont think that the amount of capital in the industry necessarily will shrink. The number of players will certainly go down over time. Then again, there there be startups and new participants. Is the Fee Structure going to change . A ceo was on cnbc this morning and said two and 20 is dead. I think there are some investors who certainly its what the investor receives after paying the fees that matter. Some investors, managers have certainly justified the fees they have charged. Others have not. I think capital will flow to the people who can justify the fees they charge. If you were an investor in a hedge fund looking to give money to somebody, would you agree to a two and 20 structure yourself . I wouldnt select the manager based on the Fee Structure. I select the manager based on track record and strategy. Its a bit like i wouldnt select a brain surgeon based on who offers the lowest rates. You want the most talented person with the right incentives. We will come back and talk more with bill ackman. Charlie munger fights back against the criticisms of coca cola. We will talk about the battle over herbalife as well. 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In 2012, he was convicted of more than 40 counts of child sexual abuse and is serving a 30 to 60 year sentence. His lawyers say he had ineffective representation in the prior trial. No school today for almost 48,000 kids in detroit. A teacher sickout has closed nearly every Public School in the system. The Teachers Union called for the sickout after the district announced it cant pay their salaries beyond june 13th. And history in havana as carnivals adonia cruises into port, the first u. S. Cruise ship to dock there in nearly 40 years. A congo band was reportedly on hand to meet the more than 700 tourists on board. Carnival says the ship will cruise twice a month from miami to havana. Thats your news update at this hour. Special edition of the Halftime Report continues next. But not every Insurance Company understands the life behind it. Those who have served our nation. Have earned the very best service in return. Usaa. We know what it means to serve. Get an Auto Insurance quote and see why 92 of our members plan to stay for life. We are back on the Halftime Report for a live, exclusive interview with pershing squares bill ackman. I want to ask you about another company that puts you at odds with Warren Buffett, cocacola. They have an obviously large position and have for many, many years. You have said in the past cocacola quote, does enormous damage to society, that the business philosophy is to displace the water children consume with sugar water. Charlie munger this weekend called criticisms of coke quote, onesided, immature and stupid. Your response . Sure. I didnt mean to pick a fight with Charlie Munger. I was really responding to a comment he made about valeant. Now have yyou have two fight him. Maybe a different point of view. He called valeant immoral. My point is the Company Makes products that help save lives. I do disagree with the practice of buying drugs and marking them up but again, the balance of the business is a very good busy think for society. Being very familiar with issues of obesity in my family and among children, thats obviously something i have sensitivity to. Unfortunately, cocacola markets a product i think causes harm. I have no problem with adults making choices about it. But theres no disclosure about this is a product promoted to children. Talking to a colleague in the office today, his sister is a nurse, she went to nicaragua to work for a week and she says its cheaper than water there and kids drink it instead of water and all have rotting teeth. Sadly, im sure its a Great Company and been a great investment for mr. Buffett. I just dont like the product. The principal way the Company Makes money. Isnt that a tough game to play, though, when you are managing investments of public companies, because to some degree, you could make the case a lot are harmful to some extent. You look at one of your biggest holdings, big winner for you, top two selling products, oreos and chips ahoy. You probably dont eat that stuff. Heres the issue. I have no problem with kids having cookies as a treat. I eat chocolate bars. The problem i have with cocacola is so do i. Its a liquid replacement product. If cookies were replacing meals, i wouldnt own it. I would have an issue with it. Its okay for kids to have a snack. Its a snack. Its not Charlie Munger gave a speech a number of years ago where he talked about cocacolas Business Model. They are trying to grow to 16 or 18 or 20 ounces which is where it is in mexico city. If you look at obesity rates and diabetes in places like that and other countries around the world with the High Consumption of soft drinks, its a major Global Health crisis. I think the company has unfortunately targeted marketing. If you think about the symbols, some cartoon type symbols, they are designed to be appealing to kids. When i talk about friends who drink cocacola or diet coke, there have been studies about the harms of artificial sweeteners, they are targeting its promoting a product that causes has caused a health crisis. I do think soda is one of the principal contributors and its an addictive product. The people who drink diet cokes, six or 12 a day, tell you its hard to get off. Even though they know its harmful. Hes had five a difficult for the last however many years and his health is fine. Warren buffett is an exceptional human being in many ways. Just to revisit the buffett situation, you mentioned goldman, there is one more glaring. Thats when Warren Buffett owned solomon. He owned 12 on a diluted basis. At the time that solomon went through the bid rigging scandal with the treasury department. Huge respect for him, but things can go wrong at Companies Even though somebodys in charge who you respect even though you own stock in, you have done Due Diligence. Thats a pretty egregious example of a bad actor at a company. Now, good thing buffett owned it because he was able to intercede. Otherwise theres a real change of bankruptcy. I look at that situation, i watch buffetts testimony before i rewatched the solomon testimony before i testified in front of the senate because i thought it was a good example. Buffett talked about not allowing the stain caused by a few individuals to take down a company and the many many thousands of employees, and the good work they do. I think its critically important the same thing that valeant is not tainted by the actions of a few people and that the 22,000 plus employees here working hard every day, right now, you go to a dinner party and youre sitting next to someone and you are a valeant employee and they say where do you work, unfortunately, right now theyre embarrassed by that. Thats unfortunate. Valeant has made some mistakes. We may at some point change the name of the company. The principal asset is bausch and lomb. Thats a great brand name. There are things we can do in terms of changing the name. You dont indict, where Charlie Munger is wrong, you dont call a company a sewer because the company made a mistake. Goldman sachs is not a sewer. Solomon brothers is not a sewer. Companies make mistakes. If you look at what we accomplished in the last five weeks, we along with the board in bringing in great new leadership to the business, some directors stepping down, new directors joining, i just think that we are on our way to saving what is a Great Company. A lot of hardworking people, its important we save the company for the benefit of those people and the products and employees they have. On that note, in that sort of heart you are saying, would you consider rolling back the prices on some of these drugs that valeant has raised by what i think conventional wisdom says enormous amounts . So one of the things i testified about in the senate is that the board was going to take up this topic very promptly. Joes first day on the job, we are going to obviously, im sure hes watching today and this is his absolute, among other things, stabilizing the company, but responding to the senate and we will respond. Are rollbacks of some of these prices on the table . Absolutely. A good number of drugs . Were not talking about a large number of drugs. Most of the drugs are the drug on the list of prices has already gone off patent and is a generic. Particular drugs in question, there will certainly be a prompt response. The board is looking at putting together a Board Committee to oversee issues. By the way, its not just pricing. One of the problems we heard in the Senate Hearing was Patient Access, where certain patients for some reason even though valeant has Patient Access programs, they do give away the product if they couldnt get access to it. Those are the things joe papa will be focused on. I agree with you on cocacola and they agree because they are diversifying the product. Obviously they see exactly what we see. Just listening to you now for 40 minutes and talking about valeant and talking about some of the prices you did, 60, 120, i think you would agree given the political rhetoric its going to continue, how long do you believe this turnaround story will take . And will you be there, are you willing to be there because it seems you have spent so much capital and mental capital and its becoming such a complicated strategy. Wouldnt it be easier just to focus on something simpler and get back to your knitting . I wouldnt say knitting is exactly these kind of situations in retrospect. If you look at the typical investment, canadian pacific, you had a railroad stock in decline meaningfully over the previous six years, considered the worst run railroad at the time. Lot of morale issues with employees at the time. We ended up in that case had to run a proxy contest to get on the board. Brought in a new slate of directors, hunter harrison, very talented ceo. That stock has come from 46 to general growth was bankruptcy. The best analysis i can make to valeant in terms of my experience. Stock had dropped from 63 to 43 cents. We bought 25 of the company. I was invited to join the board and in the board room were a lot of really good high quality people presiding over the worst performing stock, probably one of the worst performing stocks of the crisis and they were shellshocked by everything that had taken place. There were a lot of lawyers and advisors and uncertainty. We were able to provide some direction and if you look at general growth, we brought in a new ceo. We made some changes to the board of directors. We spun off a subsidiary called the Howard Hughes corporation and saved an enormous number of jobs. That stock, if you had bought that stock for 34 cents, today you would have general growth which i think is around 29, you would have Howard Hughes, about 106, you have one for every ten so thats not ten bucks. You would have got a lot of what those have in common, you came in after. Yes. Very different in terms of the Economic Loss to us. But in terms of general growth was incredibly undervalued at the time we made the investment. There was a huge amount of uncertainty and we were able to step in and fix the problem. I think we can do the same here. How long does it take you, though . I think this will be much faster, actually. All right. I want to take a quick break, come back and talk about that other company that mr. Ackman is involved in. Herbalife. Thats after the break. Jake reese, day to feel alive jake reese, day to feel alive jake reese, day to feel alive you saw Warren Buffett talking about amazon and cocacola. We have bull bear debates on both big names. Millenials and mortgages. How potential buyers are balking when they find out it costs money to get a mortgage. Imagine that. Brian sullivan is live at the conference with big interviews including the ceo of blackberry. A special edition of Halftime Report continues after this. B most rare and magical fruit. Which provided for their every financial need. And then, in one blinding blink of an eye, their tree had given its last. But with their Raymond James financial advisor, they had prepared for even the unthinkable. And they danced. See what a Raymond James advisor can do for you. Real is touching a ray. Amazing is moving like one. Real is making new friends. Amazing is getting this close. Real is an animal rescue. Amazing is over twentyseven thousand of them. There is only one place where real and amazing live. Seaworld. Real. Amazing were back on the Halftime Report. More of our exclusive interview with persian squares big ackman. Lets talk herbalife, how big is the position today . Same. Hasnt changed. Billion dollars . Plus or minus or plus. How could this play out . It could play out soon. One way or the other. Yeah, look, i think the government is going tookt soon. I believe that based on the disclosure in our 10k. And we think the government is going to do the right thing. We think this company is causing enormous arm. I had an opportunity and asked about it in the Senate Hearing and hopefully the senate will take an interest in the company. I think it will be a great thing if they would take up the herbalife. If they run a good hearing, i think it will be great. Herbalife new york coming on today and isnt me the following statement. Id like to get your reaction. Herbalife us is spand a three year attack and not only survived but thrived. Were in a much better place from an earnings perspective. We cut back on costs and come together as a group. Adversity will do that to an organization. It has for ours. It was a valiant 3 1 2 year try. But after spending hundreds of millions of dollars and having a negative return on the investm next. T, maybe it is time for bill to move on. How do you respond to that . First of all, its not true. They say theyre in a much better perspective. The company has deteriorated dramatically. The company is supposed to earn 7. 50 and the companys guidance is 7. 25. The business deteriorated and, you know, michael wants to shine a spotlight on the company. I think theyve done a good job doing that. I think were going to get the government is going to do its job. You said in the past youd never do another short sort of investment to the magnitude of this. Its not the scale, i think being a public short seller and this is where i have taken advice from Warren Buffett. He shorted stocks early in his history. Its just not worth the return on brain damage and reputational damage that comes from being short a company. And if youre short publicly, youll take a huge amount of scrutiny. There is actually a fantastic film that premiered at the tribeca Film Festival called betting on zero. We had absolutely nothing to do with. One of the producers went to harvard with you. This is true. If you do the math, there were 1600 people in my class. This woman who is a group overlapped with me. The number of students overlapped with me and Something Like 10,000. The chances of, yes rs i do actually know devin she was the first vote and unfortunately i wasnt on the first vote. You didnt contribute a dime making this . No, nor have any of my friends. I met the person who financed the film the night of the film. At some point i think hell reveal who he is. But its not someone that has any affiliation with me. How much of your legacy is going to be tied to this whole drama . Hopefully ill do lots of more important things. Fwhut is actually one of the most important things ive been involved with in terms of highlighting a company that caused Enormous Economic harm. I think the government will ultimately agree and take appropriate action. I think it will be one of the most important contributions i made. If you think about the people harmed here, its undocumented and low income latinos, its a population i knew very little b i got involved philanthropically with this organization. My family came to this country 130 years ago and we were the equivalent of immigrants coming over. If they were taken advantage of by a business fraud like herbalife, i wouldnt be here. There is another side, isnt there . You made arbitrary claims. Thats completely false. This company caused enormous harm. If i if you find yourself as an herbalife employee right now today, you should leave the company. This is not a good thing on your resume. I would find another job. This is a company that causes enormous harm the people that now. So its an embarrassment to the country. Its an embarrassment to the country that this Company Trades on the stock exchange. What do you do if the government doesnt side with your argument . I think lets stay tuned for the government to come to the conclusion. I believe they will side with our argument. Joe . Well, and its along the lines of the government doesnt. Back in august of 2013, you basically took the loss, you walked away from j. C. Penny. People dont talk about that was the right decision based on what jcpenney has done. So youre not afraid to take a loss. Thats correct. What is it whether it be valeant or herbalife . Herbalivestock trades as if the probability of the government outcome here that does anything materially negative to the company very close to zero. Right . The stock is trading at 15 times earnings. Historically herba life traded at 12, possibly 13 times earnings. Its actually above business of this quality. It hasnt grown in the last year. If sales are declining a bunch of different markets. The risk of being short herbalife is minimal. Is there if the ftc does nothing, the stock is going to go up that day. So i think, you know, sif the stock were at 20, its different than if its at 59. Certainly valuation helps my thesis. If we learn a new fact that was inconsistent with the original conclusion on the company that would cause us to reassess it and in the case of valeant, we learned new facts and the stock adjusted. At 30 a share, the market is saying there is a chance this company disappears. The earnings are not going to happen or some kind of very negative outcome here. We think the probability of that is small. You know, if you just take valeant and assume no increase in the Company Valuation and look at enterprise value basis, the Company Takes the Free Cash Flow and doesnt make another acquisition, they go from 30 over the next five years to something well into the high hundreds just on running out, if you will, the existing business. The reason for that is that core assets of the company, not the business of raising prices which is going to shrink as a percentage of revenues but the Core Revenues and the biggest miss on the street is that people are underestimating the growth that is inherent to sales which will be a massive part of the growth. Isnt it possible that valeant can reform itself and herbalife could, too, or is the model inherently evil. Is there no way to do it where you could say okay, they got their act together. They had a bad name similar to valeant . Is that out of the possibility . Yes. Look compare, valeant makes products that help save peoples lives. They cure diseases. For a subset of business, there were products where they would bias sets and mark up the price. These are assets going off patent quickly. Generics coming in quickly. Some of the drugs mentioned, there will be generics in the next several years. So that part of the business is going to shrink. Part of the business is going to grow is the high multiple businesses like bausch lomb, branded generics and dermatology. These are valuable franchises of the company. Compared with herbalife, the principle product is formula one. Slimfast sales have gone from a billion to 100 million. Slimfast is a quarter of the price. Theyre selling massively overpriced products. The only way the people in the chain can make money is by recruiting people under them. Its not a viable Business Model. If they got rid of the inventory loading requirements, the ftc said you cant force people to buy 3,000 of this product up front. Can you only pay them when they sell product to a third party and a commission based, the business would be done. I have less than a minute left. I want to end on this. Is activism still alive and well or dead or dying . Certainly think its alive and well. I know today is all about valeant, but were major shareholder of the company. We were invited on the board six weeks ago and in six week period of time working with the existing board and i want to say great things about the existing board. I dont want them to take in terms miff working experience its been superb and bob ingraham is going to help in the transitionst new directors. Look at what an outside shareholder can do, coming in, recruiting a new ceo and felt comfortable. Thats what brought him to the table. Thats a great indication of the success. Thank you for being here today. Bill 5 ackman, that does it r us. Power lunch begins right now. All right. Welcome, everybody. Scott, please do not go far. We got a big two hours of power lunch on tap including you and just a couple minutes and, two big power players. Welcome, everybody. Tyler mathisen along with Michelle Caruso cabrera. Welcome home. Thank you. Wonderful work in iran last week. Brian sullivan is live in beverly hills. Well get to him. Melissa lee is off today. We begin with the power player, maybe in the world of investing, that would be Warren Buffett. Berkshire Hathaway Holding the