Valeant CEO Returns From Leave, Company Withdraws Guidance

Valeant CEO Pearson Returns From Medical Leave
  • Drugmaker will reschedule earnings, internal review ongoing
  • Company said to hold call with sell-side analysts later Monday

Valeant Pharmaceuticals International Inc. is withdrawing its financial forecast and will delay releasing fourth-quarter results, as Chief Executive Officer Michael Pearson returns to the drugmaker grappling with questions about its business practices, strategy and accounting.

Pearson, who has been on a two-month medical leave after suffering from severe pneumonia, will give up his chairman title. Robert Ingram, a board member, will fill that role, Valeant said in a statement Sunday. The shares fell 7.4 percent to $74.67 at 1:36 p.m. in New York.

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Michael Pearson
Michael Pearson
Photographer: Scott Eells/Bloomberg

The drugmaker, whose stock has lost more than two-thirds of its value since August as scrutiny on its business intensified, had been scheduled to give an overview of its fourth-quarter results on Monday, though was delaying making a formal regulatory filing. It will wait to file its annual report until an internal investigation by the board -- which is partly focused on Valeant’s relationship with controversial mail-order pharmacy Philidor Rx Services LLC -- is completed. The board committee is also looking at Valeant’s accounting.

The drugmaker will hold a call for sell-side analysts later Monday that will include Pearson, people familiar with the matter said, after canceling a public call that was scheduled for earlier in the day. It would be Pearson’s first event with analysts since December. The people described the call on condition of anonymity because it hasn’t been publicly announced.

“The withdrawal of prior 2016 financial guidance is clearly negative,” said BMO Capital Markets analyst Alex Arfaei, whose own estimates were below the company’s forecasts. Still, the return of Pearson as CEO is positive, because “few other executives would be as qualified, and incentivized, in turning Valeant around,” Arfaei, who rates the stock market perform, wrote in a note to investors.

Pearson built Valeant into a Wall Street darling through serial acquisitions and a lean research and development model before the drugmaker became a poster company for aggressive price hikes. The CEO, who was hospitalized in late December with severe pneumonia, went on sick leave as he was attempting to regain investors’ trust after the company came under fire for the price increases and its relationship with Philidor. “Some unexpected complications resulted in a longer hospital stay than anticipated,” Pearson, 56, wrote in a memo to employees on Jan. 25.

The news of his return is “encouraging because Pearson is a visionary who created significant value for shareholders over several years,” Morgan Stanley analyst David Risinger, who rates the shares neutral, wrote in a note to investors. “It also suggests that Pearson will not be implicated in any wrongdoing associated with the Philidor controversy.”

Multiple Challenges

Pearson is returning to a company facing multiple challenges. Among is the impact of its now-severed relationship with Philidor; decisions by drug benefit managers Express Scripts Holdings Co. and CVS Health Corp. to curtail coverage of expensive medicines like toenail fungus drug Jublia; a ballooning debt and the potential impact in the long term of the introduction of a generic version of its gastrointestinal drug Xifaxan.

Arfaei, the BMO analyst, said he’s not too concerned because Valeant is confident that much of its patents for the drug expire between 2019 and 2029. “Nonetheless, Xifaxan is a key growth driver for Valeant, and this adds yet another uncertainty, albeit small, for shareholders at a time of heightened sensitivity,” he wrote.

Interim CEO Howard Schiller, a board member and the company’s former chief financial officer, will step down but remain on the board. Valeant had said in December that it expected sales of $2.7 billion to $2.8 billion in the fourth quarter, and adjusted earnings of $2.55 to $2.65 a share. For 2016, it forecast sales of $12.5 billion to $12.7 billion and adjusted earnings of $13.25 to $13.75 a share.

Ingram said Sunday that the illness had made it clear it was important to plan for a successor to the CEO. 

“Given the size and breadth of our company, succession planning and building out our senior team to provide additional resources and support for Mike are high priorities for the board,” he said in the statement.

‘Disappointing’

“I realize that recent events are disappointing to everyone and it is my responsibility to set the appropriate tone for the organization,” Pearson said in Sunday’s statement. “My immediate priority will be to build stronger relationships with important constituents, such as managed care and other channel partners, regulators and government representatives, while improving Valeant’s reporting procedures, internal controls and transparency.”

Pearson took over Valeant in 2008, bringing with him a business model honed over 23 years as a consultant at McKinsey & Co. that centered on an unconventional approach eschewing research and development in favor of acquisitions. He also had great ambitions: In January 2014, he said he wanted Valeant to be a top 5 pharmaceutical company by 2016.

Deals and Debt

He made more than 50 acquisitions totaling $34 billion -- including Bausch & Lomb Inc., Medicis Pharmaceutical Corp. and Salix Pharmaceuticals Ltd. -- and accumulated more than $30 billion in debt. Pearson bought older treatments already on the market, at times substantially raising their prices.

Paying down debt remains a priority for the company, Pearson said Sunday.

The price hikes drew criticism from lawmakers, health insurers and pharmacy benefit managers. So did reports on its relationship with Philidor, which specialized in helping doctors and patients get access to Valeant drugs even when insurers declined to cover them. Valeant said on Oct. 30 that it would cut ties with Philidor. On Dec. 15, the drugmaker announced an agreement to sell skin and eye medications through Walgreens Boots Alliance Inc. at a lower price.

With Pearson on medical leave, interim CEO Schiller represented the drugmaker at a congressional hearing in early February and promised to end an era of sharp hikes. Schiller joined Valeant in 2011 as chief financial officer, and announced his desire to depart in April 2015. He remained a director and consultant after stepping down from his finance post.

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