New Valeant CEO Papa Trades Challenge at Perrigo for Fresh One

  • Papa tested in bruising fight against Mylan's hostile takeover
  • Valeant remains embroiled in investigations, sales questions

Why Joseph Papa Left Perrigo for Valeant

Joe Papa has seen the ups and down of the drug industry firsthand. But he’s never run anything quite like Valeant Pharmaceuticals International Inc.

Papa, who takes over as Valeant’s chief executive officer next month after an almost decade-long tenure atop Perrigo Co., is familiar with how fast investors can turn on a high-flying company. Over his tenure, Perrigo’s shares rose more than 10-fold, only to lose more than half their value in a year as the company undertook a bruising takeover defense against Mylan NV.

Joe Papa

Photographer: Chris Goodney/Bloomberg

At Valeant, the issues he will face are far larger, and the stock has lost more than 80 percent of its value since an August peak. Papa, 60, will have to rebuild Valeant -- and its stock price -- from the ground up, creating a new strategy that doesn’t depend on large price increases or continuous acquisitions. 

Sudden Move

While he has decades of industry experience, Papa also opened himself up to criticism that he’s trading in one troubled drugmaker for another. On Monday, Perrigo said it was cutting its forecast, and might have to take a charge on its 2015 acquisition of Belgian drugmaker Omega Pharma NV.

“He’s leaving his firm Perrigo in terrible shape,” Ram Selvaraju, an analyst with Rodman & Renshaw, said in a telephone interview.

Valeant, meanwhile, is facing investigations from Congress and the U.S. Securities and Exchange Commission and may need to sell off businesses to pay down some of its more than $30 billion in debt, has cut its forecast, and will restate earnings for 2014 and 2015. The company announced in March that CEO Mike Pearson would leave once a replacement was found.

“It looks like he’s abandoning ship and going to another company that’s even more troubled,” said Selvaraju, who has a buy rating on Valeant; he doesn’t cover Perrigo.

Perrigo’s board was surprised by Papa’s decision to take the Valeant job, according to a person familiar with the situation. The person asked not to be identified because the matter was private. The board moved quickly to make John Hendrickson, who was named president of the company in October, the new CEO, according to the person. Attempts to reach Papa directly, through Valeant and Perrigo, weren’t immediately successful.

While running Valeant will be a challenge, it may be a well-timed one, said David Amsellem, an analyst with Piper Jaffray & Co. Investors have been sitting on the sidelines, waiting for Valeant to file its delayed annual report and hire a new leader to restore credibility.

“There’s virtually no downside for him, since all of the missteps and malfeasance happened under someone else’s watch,” Amsellem said. “Even if Valeant were to go bankrupt, he most likely wouldn’t get blamed.”

Pearson, through his lawyer, declined to comment. Papa, in a statement, said he was “excited to take on the challenge of leading Valeant and helping the company chart a new course.”

Long Experience

Papa has spent decades in the industry working for brand-name and generic drugmakers. He worked at Novartis, one of the largest brand-name drugmakers in the world, and then in 2000 joined Pharmacia Corp. as president of global country operations. He then moved to generic-drugs manufacturer Watson Pharmaceuticals Inc. as chief operating officer before taking a senior role at Cardinal Health Inc., one of the U.S.’s largest drug distributors, in 2004.

“This represents a home run for Valeant,” Murali Ganti, a credit analyst at Citigroup Global markets, said in a note to clients after media reports last week saying Papa might take the job. “His deep experience and industry knowledge are vital to stabilizing the Valeant complex.”

Pearson’s Ouster

Pearson was first lauded as the stock rose and he made deal after deal, gaining billionaire investor Bill Ackman as one of his biggest supporters. After Valeant faced mounting troubles in recent months, the CEO lost Ackman’s backing. The investor, whose Pershing Square Capital Management LP has become one of Valeant’s biggest holders, criticized Pearson for failing to communicate with investors and the public about the company’s challenges. Ackman now sits on Valeant’s board.

Papa was most recently in the spotlight during Perrigo’s defense against Mylan, which made a $26 billion hostile takeover attempt last year. In a bitter back-and-forth between companies, Papa questioned Mylan’s leadership, scoffed at its valuation of Perrigo and flew to Israel for face-to-face briefings with the company’s largest investors aimed at scuttling the proposal. He was victorious -- just 40 percent of Perrigo holders tendered their shares to Mylan in November -- but at a price. Shares of Perrigo fell 18 percent between when Mylan’s bid was rejected and when reports circulated that Papa might depart for Valeant.

Stock Options

By leaving Perrigo, Papa will forfeit about $16.4 million in unvested stock options and restricted shares of Perrigo, based on Thursday’s close. Companies often replace equity awards that new hires have to leave behind when they switch jobs. A Valeant spokeswoman declined to comment on whether the company might do so for Papa.

One thing Pearson and Papa have in common is that both relocated the legal addresses of their business abroad, moves known as “tax inversions” that are used to escape high corporate tax rates in the U.S. and gain access to foreign-made profits. In 2010, Valeant used a deal with Biovail Corp. to shift its legal address to Canada. Perrigo, in 2013, bought Elan Corp. for $8.6 billion, shifting its address to Ireland. Both companies have kept their operational headquarters in the U.S.

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