Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Mike Pearson reportedly fought to return to Valeant as CEO after a serious illness, saying he was the right person to steer the ship, and the board finally agreed. That was clearly an error; Pearson immediately steered Valeant into a maelstrom.

Pearson is so closely identified with everything that has gone wrong with the pharmaceutical company -- including an astonishing series of accounting and public relations screwups -- that he became too toxic to keep. After disclosing Monday morning it would have restate a variety of financial results from 2014 and 2015, Valeant had little choice but to admit its mistake and let him go. 

Without Pearson
Valeant's fall from grace has been acute and shocking after sharply revising its growth outlook last week.
Source: Bloomberg
Intraday times are displayed in ET.

Pearson, hired to turn around a struggling Valeant in 2008, built a business model that relied on debt-fueled acquisitions, low R&D spending, and big price hikes on older drugs. That worked for a time, but the company now has $30 billion in debt, which some doubt it can pay off. That takes further acquisitions off the table. Valeant is now worth less than what it spent on acquisitions last year, raising questions about its judgment. Big price increases have become all put impossible with the company under intense political scrutiny. Pearson's strategy, once hailed as visionary, was a big bet that has gone wrong. Strike one.  

Pearson also created the culture that has gotten Valeant into so much trouble. When things were going well, his high-flying rhetoric and financial goals turned the stock into a favorite of hedge fund investors such as Pershing Square's Bill Ackman. But there was a dark side to that. In its 8-K filing disclosing its restatements, Valeant said the "tone" at the top of the organization -- which focused intensely on hitting challenging targets -- may have contributed to financial misconduct.

It's easy to draw a line from that statement to the first domino in Valeant's collapse -- the company's undisclosed relationship with specialty pharmacy Philidor, which it allegedly used to aggressively boost drug sales. Pearson may not have come up with the idea, but he may have created an environment that enabled it.   

Strike two. 

More immediately, Pearson's performance since returning to work February 29 has been a near-total disaster. His tenure started with an announcement the company was withdrawing 2016 revenue guidance it had reaffirmed in January and the surprise disclosure of an active SEC investigation. The numbers the company released last week were far worse than expected; 2016 revenue expectations were cut by $1.5 billion dollars. The company's delay in filing its 10-K annual report puts it in danger of default. The whole fiasco sent shares down 61 percent over the course of a week. 

The earnings and guidance call on March 15 could scarcely have gone worse; the company was forced to make a live, $600 million correction to an Ebitda forecast, and Pearson joked awkwardly about his potential severance package. 

A week later, Valeant announced it will have to make further restatements and that it had asked board member and ex-CFO Howard Schiller to resign due to what it calls "improper" conduct, though Schiller denies any misconduct. It's been three weeks of non-stop bad news, proving Pearson isn't a crisis or turnaround CEO. 

Strike three. 

"There is no other big shoe to drop that I am aware of," Pearson apparently told top staff earlier this month. An unexpected $1.5 billion cut to revenue forecasts was a pretty big shoe, actually. Monday's disclosures were a steel-toed jackboot.  

Shares were up 14 percent Monday morning on the news that Pearson is out and Bill Ackman is joining the board.  

Ackman In, Pearson Out
Shares are up on Valeant's upcoming change in leadership
Intraday times are displayed in ET.

 

On last week's earnings call, Pearson said earning back Valeant's credibility was on him. He was at least partly right: Restoring credibility had to start with his departure. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net