How Valeant challenged convention—for better, then for worse

Michael Pearson’s desire to build an unconventional pharmaceutical company has thrown Valeant into turmoil

 
Valeant Pharmaceuticals CEO Mike Pearson

Valeant Pharmaceuticals CEO Mike Pearson. (Portrait by Benjamin Lowy/Contour/Getty)

 

Update: Valeant Pharmaceuticals announced on March 21 that CEO Michael Pearson is stepping down, but will stay on until a successor is found. “While I regret the controversies that have adversely impacted our business over the past several months, I know that Valeant is a strong and resilient company, and I am committed to doing everything I can to ensure a smooth transition to new leadership” Pearson said in a statement. The company also announced that Bill Ackman, whose firm Pershing Square Capital Management owns a 9% stake in Valeant, will join the company’s board of directors.

Michael Pearson, the embattled CEO of Valeant Pharmaceuticals, sees himself as something of an iconoclast. “Who I admire most are people who try to challenge conventional thinking,” he told Canadian Business last year. “I think if all you do is try to do what everyone else has done you’re almost destined to be average.”

Pearson put that philosophy into action at Valeant, which he transformed into an unconventional drug manufacturer. For years that strategy worked wonders, propelling Valeant to the status of the most valuable company on the TSX. (It also contributed to Canadian Business’s panel of corporate leaders naming him CEO of the year just six months ago.) The company accumulated debt through a flurry of acquisitions and aggressively cut costs, especially in research and development. Pearson took pride in bucking the trend. But that unconventional approach has landed the business in trouble. Valeant’s long-awaited, much-delayed fourth quarter earnings released this week lay bare the fundamental weaknesses of the company’s strategy.

The earnings report was bleak: Valeant lost US$336.4 million in the quarter, and lowered revenue expectations for 2016, noting that growth had slowed in its dermatology, gastrointestinal and women’s health products. The company also said it was delaying the filing of its 2015 annual report, putting it at risk of defaulting with some of its debt holders. (The report is postponed pending an investigation into a previously undisclosed relationship with specialty pharmacy Philidor Rx Services. Valeant is appealing for an extension.) As a result of the all the bad news, Valeant’s stock crashed roughly 50%.

Chart showing performance of Valeant Pharmaceuticals since 2007

Valeant has differentiated itself by purchasing companies that already boast late-stage drugs, rather than investing heavily in R&D. Pearson, when he took over as CEO in 2007, wanted to get Valeant out of the mindset of competing with other drug companies and steered it toward over-the-counter treatments for relatively minor health conditions. The trouble with that strategy, says Veritas analyst Dimitry Khmelnitsky, is that the company doesn’t have any blockbuster treatments. “Few of Valeant’s drugs are lifesavers that have no competing or suitable substitutes,” he says. Furthermore, each of Valeant’s flagship products face challenges.

Take Jublia, for example, a treatment for toenail fungus. One treatment round costs $1,000. Older, generic versions are also effective at addressing the same condition at a lower price. The American drugstore chain CVS said in February that it would require customers to first try less expensive drugs before it would sell them Jublia.

Another drug, Xifaxan, treats irritable bowel syndrome. Xifaxan was considered to be a key component of the company’s future, “the crown jewel of Valeant’s $11.1 billion acquisition of Salix Pharmaceuticals last year,” according to the Wall Street Journal. But rival company Allergan is challenging Valeant’s patent for the drug, while developing its own generic version. Allergan argues that Valeant’s patent is unenforceable. Analysts believe Allergan, which has a long track record of successfully mounting patent challenges, has a good chance of winning its case.

Meanwhile, a drug called Addyi that’s designed to treat low libido in women has failed to net impressive sales figures. The Food and Drug Administration in the U.S. has said the drug, which must be taken daily, can cause a litany of side-effects and noted that it might not be the right course of treatment for most women.

Another matter of concern is how much of Valeant’s growth is organic. Pearson contends Valeant is adding customers and prescriptions, while some analysts, such as Khmelnitsky, argue growth is coming from price hikes.

Valeant has been singled out for raising prices on two drugs in particular—Nitropress and Isuprel. Democratic presidential candidates Hilary Clinton and Bernie Sanders took aim at Valeant, which is now under investigation by a Senate sub-committee (along with a separate probe by the Securities and Exchange Commission).

Valeant conceded that “the prices of both drugs did not reflect their true value to hospitals and patients,” and that they have “responded by offering volume-based discounts of up to 30% for each of them.” Now that it’s under such intense scrutiny, Valeant will have to approach price hikes with caution, which could put a damper on revenue growth.

Pearson’s acquisition binge has also left Valeant saddled with debt, constraining the company’s ability to acquire new firms, at least in the near-term. Valeant now has close to $30 billion in long-term debt (it was previously believed to be in the ballpark of $19 billion). Pearson said in this week’s earnings call that any free cash will go towards paying down debt, and that Valeant is looking at shedding non-core assets.

Pershing Square’s Bill Ackman, one of Valeant’s biggest shareholders, has previously suggested that the company should look into selling some of the assests it purchased when it was still on a hot streak, such as eye health company Bausch + Lomb. Khmelnitsky says that comment has added to speculation that Valeant could eventually be parcelled off and sold—if Pearson can’t restore investor faith.

While it might not come to that, it’s unlikely Valeant’s stock will reach the same heights again any time soon. Valeant has simply crash-landed back to earth.


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