Introduction: Valeant may strain to engineer way out the in door

By Robert Cyran

Valeant Pharmaceuticals International is a classic case of how Wall Street clings to the power of an idea, and just how hard it can be to let go. Consultants and hedge funds used the drug company as a vessel to redesign a huge segment of the American economy, ostensibly to make it more efficient, while extracting profit in the process. As Valeant embarks on the next phase, with its first results under a new chief executive, the question is whether Valeant can financially engineer its way out the same way it got itself into trouble.

At its peak, Valeant grew to become a $90 billion company on the back of a debt-fueled acquisition binge, gigantic price hikes on the drugs it bought and cost cuts that largely slashed research and development of new therapies. Early investors enjoyed a 30-fold return. Valeant inspired a slew of copycats, many beyond the pharmaceuticals industry.

Compensation consultants clamored to see how the executive team, led from 2008 until earlier this year by former McKinsey consultant Michael Pearson, rewarded themselves while turning a sleepy firm originally formed by the ex-prime minister of Yugoslavia into one of the world’s biggest drug companies. More recent deals for Salix Pharmaceuticals and Bausch & Lomb, for which Valeant paid more than $27 billion combined, including debt, captured the imagination of investors – and ultimately Congress, but it was a smaller acquisition back in June 2010 when the company’s market value was less than $3 billion that first attracted Valeant to Breakingviews.

In many ways, that transaction foretold the troubles that were yet to come. It was a complicated mess of a merger where Valeant combined with Biovail, a drug company that had been accused of accounting fraud by the Securities and Exchange Commission, to reduce its tax bill by relocating to Canada.

It would take half a decade before the downfall took hold. Along the way, various subsidiaries and associated firms sued each other, employees were revealed to have used superhero aliases in emails, pushy investor Bill Ackman became Valeant’s de facto spokesperson and the company fired its chief financial officer but couldn’t remove him from the board of directors.

The company, with its shrunken $10 billion market value, in April hired Joseph Papa from rival Perrigo to lead a turnaround. In some ways, it signals more of the same. Papa merged Perrigo with an Irish rival a few years ago to reduce the company’s taxes and later spearheaded a rejection of unwanted suitor Mylan, only to have the company’s stock tumble by more than half.

Nevertheless, investors may be counting on more financial wizardry. Japanese rival Takeda and buyout shop TPG recently offered to buy Valeant and break it up. Valeant could sell big businesses on its own, too. The trouble now is that $30 billion of debt coupled with the neglect of R&D could make it hard for private-equity firms or other suitors to make deals work. That doesn’t mean all concerned won’t try, though.

Published on June 6, 2016

(Left image: REUTERS/Eduardo Munoz)

(Right image: REUTERS/Jonathan Ernst)


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