Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

It wasn't too long ago that Valeant Pharmaceuticals was a little-known name outside of the drug industry -- and even in it. A series of large, debt-charged acquisitions, beginning with a Canadian tax-inversion deal in 2010, changed that. CEO Mike Pearson quickly turned Valeant into one of the most fascinating companies in pharma, setting a new bar for the industry as far as growth went. 

As it turns out, though, Valeant's strategy was unsustainable and Pearson's vision has mostly failed. So now, other pharmaceutical executives can take a breather.

The Rise and Fall
Valeant couldn't sustain its momentum. Once the industry's outperformer, its stock price has dropped about 90 percent in the past six months.
Source: Bloomberg

Ever since the 2010 inversion, when Valeant merged with Canada's BioVail Corp., it purchased companies at a rate that other players couldn't -- and didn't necessarily want to -- keep up with. 

Its takeover binge had suddenly put pressure on everyone else to reconsider their approach. Few analysts questioned Valeant's method. Its stock rose five-fold from 2011 through 2014, as it acquired at least 35 targets -- more than any of its peers -- for about $16 billion in total. (That's not including its failed $56 billion hostile bid in 2014 for Botox maker Allergan, in what was a team effort with hedge-fund manager Bill Ackman. Allergan, which merged with Actavis instead and is now in a merger pact with Pfizer, had a market value Tuesday of $108 billion. Valeant's is $10 billion.)

Party's Over
Valeant's plight allows other drugmakers to take a chill pill.
Source: Bloomberg
*Excludes animal-health unit that was spun off

Before it all unraveled, the hype around Pearson's aggressive M&A strategy had indirectly helped trigger an industry-wide merger wave. Not only was a record amount of money spent on drug M&A, but there were more than a thousand of these transactions in 2015, well above any other year. 

The Great Deal Feast
As Valeant transformed itself into the industry's top dealmaker, other drug companies began to embrace large mergers and acquisitions, too. Takeover valuations soared.
Source: Bloomberg

Now, the very company that led the pharma industry down this path has lost the respect of investors and analysts. A series of acquisitions turned into a series of blunders and scandals, from how it booked revenue on products it sold through its shady Philidor Rx pharmacy to how its former CFO, accused of misconduct, refuses to step down as a director. Pearson is on his way out. Ackman, Valeant's No. 2 shareholder, is becoming more entrenched, joining the company's board this week.

Valeant had about $31 billion of debt as of its latest filing, triple its market value and 7 times the Ebitda it earned in the most recently reported 12-month period. Its bond prices have tumbled. Needless to say, it won't be making acquisitions any time soon. The company has delayed filing its annual report, which could wind up triggering a default on some of its bonds and loans. 

These events and the eventual outcome for Valeant will have a lasting impact on the pharma industry -- not just in terms of how these companies think about M&A, but also how they book and grow their revenue, boost their stock prices, communicate with investors and interact with activist firms. Vicki Bryan, an analyst at Gimme Credit who saw the Valeant mess unfolding long before most others, wrote this Monday night, after Valeant added Ackman to the board:

It "implies that the board still thinks fixing the stock price is a cure, rather than a symptom, of the company's myriad problems."

Ackman has attributed much of the decline in Valeant's stock price to poor public and investor relations and promises to overhaul the company's communication efforts, people who attended Valeant's employee town-hall meeting told Bloomberg News. But to everyone else, this seems like more than a bad-press problem. Until that's realized, Pearson's departure won't change much of anything at Valeant -- even if the company's plight changes the rest of the industry. 

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net