Valeant Targets Corporate ‘Fat’ in Push for Big LeaguesHugo Miller
After Valeant Pharmaceuticals International Inc. bought Bausch & Lomb Inc. for $8.7 billion last year, Chief Executive Officer Mike Pearson discovered the budget for the eyecare company’s communications team was 13 times the size of his own.
Pearson set about cutting the budget and dismantled Bausch & Lomb’s structure of regional offices, costs he said are emblematic of how inefficient drug companies remain. Corporate excess is catnip to Pearson as he searches for acquisitions to meet his goal of making Valeant one of the world’s top five drugmakers by the end of 2016.
“There’s a very bloated cost structure in the pharma industry because of how much money they make,” Pearson said, listing personal secretaries and investment bankers as unnecessary expenses, in an interview at Bloomberg’s Toronto office yesterday. “We tend to look for companies with problems that we can fix. We like companies that are fat, lots of costs that we can take out.”
Pearson, 54, who took the helm of Laval, Quebec-based Valeant in 2008, has spent at least $19 billion buying more than 35 companies in his drive to leap into the drug big leagues. Rather than spend what he says can be billions of dollars developing drugs from scratch, he buys companies with existing products like Bausch & Lomb, his biggest acquisition to date.
Pearson reiterated yesterday he’s aiming to do a similar-sized deal this year, declining to name any companies. Teva Pharmaceutical Industries Ltd., the Israeli maker of generic drugs, has been mentioned as a possible target by analysts including Raghuram Selvaraju of Aegis Capital in New York.
He said he’s looking at segments such as opthalmology, dermatology and dentistry, areas in which the company already has a presence. Valeant bought dental care company OraPharma Inc. for $312 million in 2012, acquiring the product Arestin used to treat gum disease.
“In the United States, $20 billion of products run through dental offices each year,” the CEO said. “It’s entirely underserved. It’s a great market.”
The company favors products where consumers pay, rather than governments, and regions where drug use is growing fast, including the U.S., Southeast Asia, Poland and Russia.
In Russia, Valeant sells $400 million to $500 million worth of over-the-counter medicines like AntiGrippin for treating colds. Sales growth in the country was as high as 20 percent and has slowed since the onset of the Russia-Ukraine dispute to low double digits, he said.
Pearson said he doesn’t view India as a favorable market because “prices are terrible and they have no respect for intellectual property.”
Pearson grew up the son of a Bell Canada phone company employee in southern Ontario and says he learned the importance of value early.
“I grew up in a middle-class family and every dollar mattered -- a lot.”
He and his family saved up so he could go to Duke University in Durham, North Carolina, to study engineering. He graduated summa cum laude and then stayed in the U.S. to study for an MBA at the University of Virginia. From there he went to work for consulting firm McKinsey & Co., where he stayed for 23 years and advised mining companies, a hotel chain and a chicken producer.
“What it afforded me is a perspective to how other companies are run and what the differences are,” said Pearson, who now takes about 300 flights a year instead of the 400 he took at McKinsey. “You don’t have to gold-plate everything. Spend money where it adds value and be thoughtful.”
He gravitated toward the drug industry and Valeant became a client in 2007. Impressed by the advice he gave the company, Valeant’s board asked him to become CEO and he did so in February 2008.
Valeant merged with Canada’s Biovail Corp. in 2010. The company has a sizable presence in Bridgewater, New Jersey, but is headquartered in Canada in part because of lower corporate tax rates, Pearson said. Canada’s corporate tax rate is 26.1 percent compared with 39.1 percent in the U.S., according to the Organization for Economic Cooperation and Development.
Since then, Valeant’s shares have jumped almost 10-fold to more than $140 as investors have warmed to his acquisition-fueled pledge. That has lifted the market value of the company, which trades in Toronto and New York, to about $47 billion, making it the fifth-largest company in Canada.
It has also made Pearson a lot of money. He owns 3.39 million shares, which as of yesterday’s close are worth about $478 million.
Valeant rose less than 1 percent to $141.50 at 10:17 a.m. in New York.
“He’s done a very good job with the acquisitions so far and executing them,” Ted Whitehead, who helps manage C$1.2 billion ($1.07 billion) at Manulife Asset Management Ltd. in Toronto including Valeant, said by phone yesterday.
Whitehead said he has been taking profit this year and the acquisition strategy holds risk.
“The bigger you get, it becomes more difficult,” the investor said. “The execution risk continues to go up. And when you’re integrating two big companies, there could be culture issues. It’s more than just the numbers that show up on the paper.”
Three Valeant executives have left in recent weeks. Dan Wechsler, an executive vice president who joined Valeant after Bausch & Lomb was acquired, was appointed CEO of dental services provider Smile Brands Group Inc. on March 5. Vince Ippolito, a senior vice president and former executive at Medicis Pharmaceutical Corp. that Valeant bought in 2012, was named as chief commercial officer at Anacor Pharmaceuticals Inc. on March 10.
Susan Hall was named global head of research and development at Dublin-based drugmaker Endo International Plc on March 7. She had previously held the same title at Valeant.
Though Valeant remains much smaller than the companies Pearson seeks to replicate -- Sanofi, the fifth-largest drugmaker in the world has a market value of about $134 billion -- he’s not daunted by reaching his three-year goal. The May 2013 acquisition of closely held Bausch & Lomb helped vault Valeant from a market value of about $27 billion, he said.
“It’s not based on the size, it’s what you can do with that asset,” Pearson said.
Bausch & Lomb gave Valeant contact lens brands Optima and Boston to add to its roster that includes the Fraxel laser treatment for skin care and Zovirax for cold sores. This week, its new treatment for eye bags, Neotensil, is due to go on sale.
What Pearson doesn’t spend on research and development, he plows into his sales force. Valeant has 7,000 to 8,000 sales representatives of a total workforce of 20,000 -- a proportion that is probably double other drug makers, Pearson said.
“Sales reps make the difference, they are the ones with the relationships with the doctors,” he said.
Valeant has $17.3 billion in debt, data compiled by Bloomberg shows. That puts Valeant’s ratio of debt to earnings before interest, depreciation and amortization, a measure of how leveraged a company is, above 4.5, according to a November report from Moody’s. Pearson has pledged to get that below 4 by the end of this year.
While Pearson calls on bankers to help with bond or equity issues, he says he avoids using them to advise on its deals. Valeant does that internally, tapping McKinsey alumni who work at the company like executive vice president Ari Kellen. It also helps that Valeant’s chief financial officer is Howard Schiller, who was chief operating officer of Goldman Sachs Group Inc.’s investment-banking unit from 2009 to 2011.
“Never use bankers,” Pearson said. “At McKinsey, we did that for a living.”