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Valeant CEO breaks the mold in building drug empire

By Rod Nickel

(Reuters) - At any given time, the acquisitive chief executive of Valeant Pharmaceuticals Inc is brokering multiple deal discussions and eyeing as many as 50 buying opportunities.

It's not the usual way of doing business in the drug sector, where research and development is often considered a company's lifeblood. But then there is little that's typical about Michael Pearson's approach to business.

Pearson's latest target, with help from activist investor Bill Ackman, is Allergan Inc, maker of anti-wrinkle treatment Botox. Valeant and Ackman's Pershing Square Capital Management launched an unsolicited $47 billion bid on Tuesday to buy the company.

The deal is another bold step in a strategy Pearson put into motion soon after leaving McKinsey & Co, where he spent 23 years advising companies - including Valeant - on turnarounds, acquisitions and strategy. Within the pharmaceuticals industry, that makes him a consummate outsider, a Canadian-born CEO with the eye of a strategic management consultant.

Named Valeant's chief executive in 2008, Pearson started snapping up dermatology products such as sunscreen and anti-aging items in a plan with aggressive revenue growth targets. In 2010, Canada's Biovail Corp and U.S.-based Valeant merged, with the combined company assuming the Valeant name, the Canadian head office, and keeping Pearson as CEO.

"What he has done so far is quite brilliant," said Gautam Dhingra, chief executive of High Pointe Capital Management, a Valeant shareholder. "Mike Pearson, coming in as an outsider who didn't grow up in the pharma industry, although he consulted in the pharma industry, perhaps he was able to take a more objective and calculating look."

Pearson tapped Howard Schiller, a former chief operating officer of the investment banking division at Goldman Sachs, to be his chief financial officer in 2011, a move that has helped Valeant's acquisitive strategy.

The plan that has so impressed Dhingra rests on three pillars, he says:

* Cut spending on research and development;

* Spend instead on acquisitions with proven products that will add to earnings, and cut expenses;

* And domicile intellectual properties in tax havens such as Barbados, using Valeant's Canadian head office and looser laws on taxing repatriated profits.

"You combine those three ideas, and it's a powerful combination," Dhingra said. Traditionally, he said, "a company's status is determined to some extent by coming up with a new, big drug. It's possible others have a hard time changing that mindset."

It doesn't hurt investor confidence that Valeant has consistently been a top stock performer, climbing more than 80 percent in the last year alone.

Pearson grew up in a family of modest means in London, Ontario, the son of a phone installer who sacrificed to send his son to prestigious Duke University in North Carolina, according to a feature last year in the Globe and Mail.

Early on, Pearson revealed himself as someone who was willing to work hard to achieve. As a youth, he joined the Boy Scouts and rose to Eagle Scout, the organization's highest rank.

The hard work has carried over into the head office, where Pearson favors a lean, decentralized approach that allows local managers to run their geographical areas.

The approach includes Pearson and Schiller wringing millions or hundreds of millions in cost savings out of their acquisitions, often more than expected.

Pearson joked about his parsimonious style at a meeting with about 200 investors and analysts on Tuesday in a New York office building, an unusually grandiose setting for Valeant.

"We still care about every penny," Pearson told the audience. "This whole production is being paid for by Bill Ackman." Pearson, Ackman said, made him pay for his own burrito at a recent meeting when the activist investor requested it instead of food already provided.

Cost cuts at Allergan would focus on "people sitting in offices," not staff who deal with customers, Pearson said.

CAUTION IN SOME QUARTERS

Pearson's unusual approach doesn't have universal support.

"One of the reasons we have not participated in the name has been because of certain issues as it pertains to aggressive accounting policies and the speed of their acquisitions," said John Goldsmith, vice-president of Montrusco Bolton Investments, which holds some Valeant shares on behalf of clients.

Valeant supplements its results and guidance with a measure called cash earnings per share, an adjusted measure not in accordance with U.S. generally accepted accounting principles.

For a CEO, Pearson is an unpolished public speaker. Still, he has carried out dozens of deals in his six years at the helm of Valeant, ranging from the obscure to bigger names such as Bausch + Lomb, Medicis Pharmaceutical Corp and Obagi Medical Products. Revenue has grown nearly eight-fold to $5.8 billion last year.

Pearson has not hit a home run every time he has targeted a company. He held talks last year with generic drugmaker Actavis Plc about a combination that didn't lead to a deal, and as recently as January he was eyeing Pfizer Inc's branded generics business, according to sources.

There may appear to be little strategy involved in targets that include such disparate products as contact lenses, prescription drugs and acne treatments. But Pearson has been clear about favoring segments where patients often pay out of pocket, such as ophthalmology and dermatology, cutting Valeant's exposure to cost-sensitive insurers.

He also likes spending to buy proven drugs already on the market, preferably with no expiring patents in the near term, to the unknowns of research and development departments.

"He's made the company really justify their R&D spending," said Morningstar analyst David Krempa in an interview.

The longer-term risk of cutting work on a new pipeline of products is weaker organic growth prospects and an unhealthy reliance on a steady diet of new deal opportunities.

Pearson sees no shortage of those and this year upped the ante, promising to vault Valeant from among the world's 15 biggest pharmaceutical companies by market cap to the top five. Swallowing Allergan would double Valeant's market cap to around $84 billion, based on Monday's close, pushing the company past the halfway point to its $150 billion goal by the end of 2016.

The pace of acquisitions and the goal of more than tripling Valeant's market cap concern Krempa, who otherwise holds a positive view of Valeant and Pearson.

"We'd rather just see him focus on maximizing the return on investment rather than focusing on just getting big to get big," he said. "So far we haven't seen them do any bad acquisitions, but in theory, if your goal is $150 billion market cap, you could just do big mergers even if they don't make sense."

(Additional reporting by Euan Rocha in Toronto and Bill Berkrot in New York; Editing by Frank McGurty; and Peter Galloway)

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