Valeant’s activist deal too clever by half

By Richard Beales and Robert Cyran

Valeant has tried a seven-month M&A experiment that boss Michael Pearson – and other corporate chiefs – should think twice about repeating. The $45 billion drug company’s failed tilt at Allergan alongside Bill Ackman’s Pershing Square landed a $400 million windfall. But with Actavis snatching the quarry, Ackman and Allergan’s owners have made out best. Valeant lost time and risked legally questionable tactics.

There’s nothing new or problematic about an investor buying a stake in a company, as Pershing Square did with a 9.7 percent stake in Allergan, and then agitating for a sale. Activism has been a money-spinner in recent years, delivering among the best returns of all hedge-fund strategies in 2012, 2013 and so far in 2014, according to indexes maintained by Hedge Fund Research. Ackman’s fund was up a very strong 31 percent this year through the end of October, Reuters reported earlier this month.

What was novel was Ackman’s agreement ahead of time with Valeant, a potential buyer of Allergan, to work together. Valeant must have known the move would put Allergan in play, but with Pershing Square’s votes and market clout Pearson would have hoped to have the edge.

That’s not how it turned out. Instead, Valeant and Allergan exchanged potentially damaging critiques in a long conflict. That has cost Valeant the chance to pursue other targets, in line with its strategy of growth through acquisitions. Pearson has a consolation prize, largely thanks to a 15 percent share of Pershing Square’s profit on its Allergan shares. But that may not be enough to make the scars worth bearing.

The legality of the deal Valeant made with Ackman is also uncertain. A judge ruling on whether Pershing Square could vote its Allergan shares found earlier this month that the plaintiffs in the lawsuit had raised “serious questions” about whether the arrangement violated U.S. securities rules on insider trading. That may never be settled for this case, but a successful bidder indulging in similar tactics could find itself in a legal morass, at best.

Sure, Allergan might never have contemplated an approach from Valeant alone. But an activist hedge fund doesn’t share the same goals as a corporation, even a serial acquirer. Ackman’s $2 billion or so of profit may encourage him to look for other similar opportunities. Companies would be better off acknowledging the tactic as too clever by half.

Published on Nov. 17, 2014

(Image: REUTERS/Brendan McDermid)

Deal junkie Valeant shoots up on $10 bln fix

By Robert Cyran

 Deal junkie Valeant Pharmaceuticals has shot up on a $10 billion fix. The drugmaker’s pledge last year to focus on organic growth and debt reduction didn’t last long. Cost cuts and tax savings from buying Salix Pharmaceuticals proved irresistible. What Valeant’s injecting isn’t clear, though. Salix’s numbers are fuzzy after it admitted pumping clients full of inventory.

Valeant reckons it can quickly cut at least $500 million in costs. Moreover, the combined company’s tax rate should be around 5 percent. The present value of these savings, when capitalized on a multiple of 10 – assuming its low tax rate is sustainable – surpasses $4 billion.

That’s partly why Valeant’s market value rocketed up almost $8 billion to $66 billion. It helped that the company’s fourth-quarter results, also announced on Monday, were better than expected. Revenue grew 11 percent compared to the same period last year and executives’ comments about the growth of existing drugs this year may also have excited investors. There’s also relief among Valeant’s backers that the company is back to signing deals, after its long chase of Allergan left it empty handed. Rival Actavis won with a $66 billion bid.

Valeant’s problems from its deal binges have not gone away. After whittling down its debt by about $2 billion over the past year, the new deal will nearly double its load to close to $30 billion. Questions about the company’s sustainability have not been answered either.

This deal may intensify them. Salix has been growing fast, and Valeant says this will continue after the deal closes. Yet the cost cuts Valeant is proposing equate to two-thirds of what its target spent on sales, administrative costs and R&D over the past 12 months.

Moreover, frenzied deal-making in pharma over the past few years means there are fewer high-quality assets available at reasonable prices. Salix’s reputation and market value took a hit after executives admitted in November that its stellar growth had been partially fudged as a result of overstocking clients with its drugs.

The sale values the company at slightly less than its market worth prior to the accounting scandal. Valeant is confident it understands the problem. What observers can say with more certainty is this deal junkie is going to keep on looking for more fixes.

 Published on Feb. 23, 2015

Valeant pops risky $1 bln libido pill

By Robert Cyran

Valeant Pharmaceuticals is popping a risky $1 billion libido pill. The acquisitive drug firm is buying Sprout Pharmaceuticals, the maker of Addyi, the so-called “female Viagra” that received U.S. Food and Drug Administration approval for treating low sexual desire in premenopausal women just two days ago. Valeant will have gotten a bargain if the pink pill hits its sales hopes. Snag is, the drug isn’t very effective, has bad side effects and regulatory restrictions may crimp sales.

Valeant Chief Executive Mike Pearson told CNBC that annual sales will be “in the hundreds of millions, but hopefully it’s in the billions.” There may well be a lot of demand for such a pill, but such blockbuster sales would be an accomplishment. Pfizer, for example, only sold $2 billion of Viagra at its peak.

Addyi would not need to be that successful for Valeant to pat itself on the back. A rule of thumb in biotech is that companies sell for five times revenue. Even if it takes Valeant a few years to crank $300 million in yearly revenue out of its newest acquisition, the company’s deal will look smart.

The drug has several drawbacks, though. First, its efficacy is mediocre. The drug only helped about 10 percent more patients than a placebo in clinical trials -and increased the number of times they had sex by just 0.5 to one time per month. Such figures suggest that many patients will try the pill, but not renew their prescription.

It also carries significant adverse effects. The FDA slapped a black box, its strictest warning, on Addyi because it can cause severe low blood pressure and fainting. The regulator also requires that both doctors and pharmacists be trained and certified before they administer it. That’s to ensure patients know to avoid alcohol and certain medicines like birth-control tablets that raise the risk of side effects.

Finally, during the FDA’s approval process, Sprout promised not to advertise the drug for 18 months on television or radio. All these limits may leave Valeant with a bitter pill.

Published on Aug. 20, 2015

(Image: REUTERS/Alexandra Beier)

Valeant’s back-foot problem flares up in Congress

By Robert Cyran

Valeant Pharmaceuticals’ back-foot problem has flared up in Congress. The drug company keeps fighting through chronic skepticism about its acquisitive ways and the related borrowing. Now, U.S. lawmakers have raised questions about pricing that cost Valeant $11.3 billion in market value on Monday. Always being on the defensive could eventually take its toll.

The $57 billion company’s business model is aggressive. It buys unwanted drugs and developers, and slashes costs. Because Valeant spends so little on R&D, it is heavily dependent on M&A and how much it charges for growth. For example, after Valeant bought two heart drugs from a private company earlier this year, it raised the price of one by more than 200 percent and the other 500 percent.

These sorts of increases have attracted the attention and ire of politicians. Democratic presidential contender Hillary Clinton sparked a debate last week that hit biotech valuations and prompted rollbacks on some rare-drug prices. Democrats on a House committee want to subpoena Valeant and its chief executive, Michael Pearson, over prices. Although the Republicans in charge could ignore the request, it was enough to send Valeant’s shares tumbling by 17 percent.

Although the odds are low that lawmakers would allow the government to use its heft to negotiate harder terms with the industry or impose price caps, Valeant may decide to be more conservative with its pricing anyway. The effect on its profit is unclear, but Pearson was quick to reject the “bear thesis” in a letter to employees. He said the company is “well positioned for strong organic growth, even assuming little to no price increases.” Pearson also noted that Valeant expects to generate 30 percent of its sales overseas in 2016 and that in businesses such as contact lenses price increases tend to be small.

Though Valeant’s shares have swelled by 500 percent over the last five years despite concerns about the acquisitive strategy, Pearson has more convincing to do over the price scare. Valeant already has accumulated about $30 billion in debt, or five times what analysts are forecasting for EBITDA. Combined with a weaker stock, deals may be harder to strike. If Valeant can’t raise prices or buy big rivals, the company could find itself reeling.

Published on Sept. 28, 2015

(Image: REUTERS/Mike Blake)

Valeant’s platform trembles beneath Ackman’s feet

By Robert Cyran

Valeant Pharmaceuticals’ platform is shaking beneath Bill Ackman’s feet. The hedge fund manager’s Pershing Square Capital bought a 5.5 percent stake because Valeant offered a cure for poor capital allocation by drugmakers. Now the company is facing the limits of its business plan. It is scaling back on acquisitions, investing more on research and limiting price increases on its drugs. Outsiders missed the political logic of pharma’s spending.

Valeant, which has a market value of $59 billion, has been a voracious acquirer. Chief Executive Mike Pearson diagnosed the difficulty of big companies in efficiently discovering drugs, and so Valeant slashed research and development spending at acquired firms and spent little itself. And it seasoned resulting profits by raising prices for many of its drugs.

Ackman and Valeant were correct that much of pharma R&D spending is wasted, but they missed the bigger picture. Drug company values are built upon patents and heavily regulated markets. These are creations of society. The discovery of cures to diseases shores up goodwill, and gives politicians and the courts virtuous reasons to support the industry.

Companies like Valeant have chipped away at this goodwill. Democratic presidential front-runner Hillary Clinton said last month that she had her sights on companies that jacked drug prices but spent little on R&D. Republican presidential candidate Senator Marco Rubio slammed drug companies for “pure profiteering” in raising drug prices in a speech Monday. Formerly anathematic measures such as allowing the government to use its negotiating heft to procure drugs on the cheap for Medicare could soon be on the table and attract bipartisan support.
Valeant has felt the wind shift. It will limit realized price hikes on its drugs to less than 10 percent next year. The company is mulling disposing of its “neurology and other” business, which is more reliant on price inflation. R&D spending may double next year, to $500 million.

That would mean Valeant spends about 4 percent of sales on drug development. Peers like Merck spend four times as much proportionally. Investors worry this may not be enough to escape Washington’s ire. The stock is off about 40 percent from its high this summer. That has forced the company to admit that using its shares to acquire rivals is now out of the question. Valeant’s platform looks shakier by the day.

Published on Oct. 19, 2015

Valeant sets tone for post-M&A accounting scrutiny

By Robert Cyran

Valeant Pharmaceuticals sets the tone for intensifying accounting scrutiny once merger activity slows. The drugmaker’s stock ended Wednesday down 19 percent after a short-seller and others questioned its bookkeeping and relationships with other companies. The $40 billion serial acquirer’s history may make it an obvious target, but as growth and mergers slow a renewed investor focus on companies’ figures is a logical shift.

Valeant has bought several dozen firms since 2008. The company’s stock rose more than 20-fold after Chief Executive Michael Pearson took the helm that year to a peak this past summer as deal after deal transfixed Wall Street. Since then, though, the shares have tumbled by more than half. Democratic presidential frontrunner Hillary Clinton’s stance against drug companies that raise prices but do little research and development put Valeant’s business model in the spotlight. During its latest earnings call, the company said that it would undertake fewer acquisitions, limit price increases and invest more in R&D.

Investors are now examining much more closely the stalled Valeant deal machine. There are discrepancies, for instance, in statements from the various parties about how the company is connected to two specialty pharmacies which help dispense drugs and assist patients with payments – Philidor Rx Services and R&O Pharmacy. To make it more convoluted, R&O is suing Valeant. The confusion has sparked questions about Valeant’s bookkeeping for drug sales through pharmacies like these. Valeant has categorically denied any improper accounting.

American healthcare reimbursement is complex, opaque and sometimes prone to fraud. There could be an element of confusion over similar company names. Or it may just be that Valeant’s multiple deals have created a web in which one strand has little idea what another is doing. When chief executives like Pearson do a dozen deals a year, they may spend too little time getting their new charges to work together.

Either way, the Valeant turbulence is a sign of a cyclical change in investor thinking. When growth through acquisitions dries up, there’s greater focus on the reality of sales and profit. Watchdogs, too, have shifted their attention from insider trading to accounting issues. The Securities and Exchange Commission’s newish audit task force, for example, is using special software to spot unusual numbers, dodgy off-balance sheet transactions and auditor changes. As the recent surge of M&A dies down, both investors and regulators may find they have their number-crunching hands full.

Published on Oct. 22, 2015

The illusion of debt-fuelled earnings

By Edward Chancellor

Low rates have forced investors into a dangerous search for yield. Just look at the surge in junk-bond and emerging-market corporate debt sales over recent years. Cheap money has also driven record levels of stock buybacks in the United States and fuelled a boom in corporate mergers.

This is evidence of what the Japanese call “zaitech” – the use of cheap capital to boost reported profitability. Like all grand experiments in financial engineering, though, this one too will come unstuck.

Japan’s infatuation with zaitech arose in the late 1980s, at a time when economic growth was slowing and the rising yen threatened corporate profits. Many companies responded to those headwinds by issuing warrant bonds in the eurodollar market, swapping the proceeds back into the domestic currency and investing in Japanese shares, which were held in special trust accounts.

While the Tokyo stock market soared, these companies enjoyed rising earnings and a negative cost of debt funding. However, after interest rates rose and stocks plummeted in the early 1990s, it was game over. Many enthusiastic zaitech players, such as Hanwa, reported large losses.

The mid-1960s witnessed an earlier experiment with financial engineering in America. This was the era of the conglomerate boom. Companies such as ITT, Gulf + Western, Saul Steinberg’s Leasco and Ling-Temco-Vought (LTV) expanded rapidly through acquisitions. Between 1966 and 1968, conglomerates accounted for more than 80 percent of U.S. takeovers. These conglomerates often adopted dubious accounting techniques to boost profits.

Take LTV, cobbled together by the ambitious Oklahoman James Ling. The company expanded from a core electronics business into meat packing, sporting goods, airlines, insurance and eventually steel manufacturing. Ling understood that investors -in particular, the “gunslinger” fund managers of the “go-go” era -were focused on earnings per share.

To deliver EPS growth, Ling issued convertible bonds and bank debt to finance his acquisitions. He also enticed shareholders to exchange stock for convertible securities, which further boosted EPS. Ling would often float shares in acquired companies (like today’s tracking stocks) and use the proceeds to retire debt.

As long as the stock market continued rising, these feats of financial engineering worked wonders for LTV’s shares, which climbed 17-fold between 1964 and 1967. After interest rates rose towards the end of the decade and the stock market turned down, the conglomerate bubble burst. LTV was forced to divest companies to pay down debt, Ling was fired, and his company ended up as a second-tier steel concern, eventually going bankrupt in the mid 1980s.

In a presentation at the Grant’s Conference in New York last month, Chicago-based hedge-fund manager James Litinsky drew an intriguing parallel between the 1960s conglomerates and today’s so-called platform companies, businesses which have grown rapidly through M&A.

Unlike the conglomerates, they are not diversified but focused on a single industry. Like the conglomerates, however, they have thrived in an era of financial repression, when interest rates have been kept below the rate of inflation. Like their predecessors, platform companies have been using debt to generate EPS growth. Similarly, they have been egged on by investors, with activist hedge funds replacing the gunslinger generation.

Litinsky highlighted companies from various sectors, including brewing (Anheuser-Busch InBev) and consumer staples (Kraft Heinz). But pharmaceutical companies dominate. One of them, Valeant, resembles a modern-day LTV. The firm has grown rapidly through acquisitions, such as of Bausch & Lomb, and slashing costs to meet cost-cutting targets.

Valeant platform companies

Valeant promised to take $900 million from Bausch’s $1.2 billion of operating expenses. Valeant’s takeovers have been funded by cheap debt – interest expenses relative to long-term debt have averaged below 6 percent in recent years. Cost-cutting, takeovers and low-cost loans have boosted Valeant’s EPS, which climbed from 29 cents (on a diluted GAAP basis) in the fourth quarter of 2012 to $1.56 in this year’s third quarter.Like LTV, Valeant has adopted complex financial structures. Its ownership stake in specialist pharmacy Philidor, which distributed some of its drugs, was held through what’s called a variable interest entity. Critics claim this structure, which Valeant is now unraveling, kept contingent liabilities off the balance sheet. What’s clear is that Valeant has borrowed a lot -long term debt has grown from around $10 billion in late 2012 to over $30 billion today.

Corporate roll-ups, from LTV to Tyco International, have tended to come unstuck when they stop growing. Valeant’s stock is down more than 70 percent since its peak earlier this year. Its high-yield bonds are now trading below par. Valeant’s days of acquisitive growth would appear to be over.

The Valeant story is not an isolated case of aggressive financial engineering. At a time of ultra-low debt costs, announced global M&A activity this year has reached a record $3.9 trillion, according to Thomson Reuters. Global non-financial investment-grade debt issuance has climbed to $1.3 trillion so far this year. Acquisition-related debt reached a record $365 billion, says Thomson Reuters.

Even more debt has been issued by U.S. corporations for share buybacks. Over the past five years, the top 100 share repurchasers have grown their EPS by 93 percent. Their return on equity has climbed to 19 percent from 13 percent during this period, according to Thomson Reuters Worldscope, and their shares have handily outperformed the broader market.

This may look impressive. But the buyback leaders have also seen their sales growth slip and leverage rise. Their median capital spending (relative to cash flow) is below the S&P 500 average. To deliver EPS growth, these companies have been leveraging up and eating their seed corn.

Valeant’s fall from grace is just another example of how debt-fuelled growth creates only an illusion of value. Real worth comes from companies investing wisely for the future and acquiring shares -whether their own or in other companies – at low valuations. While corporate revenue is declining and debt is cheap, financial engineering is an easy way out -until it all falls apart.

Published on Nov. 18, 2015

Valeant CEO gets called on $100 mln excess

By Robert Cyran

Valeant Pharmaceuticals Chief Executive Mike Pearson has been called on his $100 million excess. That’s how much stock he put in hock to do everything from paying taxes to donating to charity to buying more shares in the company -he even helped finance a community swimming pool.

Now he has been forced to repay the debt. Compensating bosses in equity is supposed to nudge them to serve shareholder interests. In this case it serves as an apt example of the skewed incentives that have rocked Valeant.

The pharma giant required that Pearson buy a substantial amount of stock when he took the job in 2008. It then granted him lucrative restricted equity worth $4 for each $100 of value created on his watch. The board made more such grants in subsequent years so that essentially all of Pearson’s pay came in equity and cash incentives tied to performance.

Pearson owned about 3 percent of Valeant as of its last proxy statement. His serial-acquisition strategy yielded riches for a while as the stock rose about 20-fold since he took over. The fact he has never sold any of his holdings makes the story seem even more appealing to those investing alongside him. One reason he has kept his shares, though, is because the company allowed him to use his stock as collateral to borrow money.

That can distort executive incentives. In Valeant’s case, management’s focus on rapid share appreciation has played a role in its aggressive accounting and M&A strategy. Investors have now grown disenchanted with the results and are questioning whether Valeant has grown too fast. The company’s involvement with a specialty pharmacy that has been accused of seeking improper insurance reimbursement and altering prescriptions has added to investor skittishness. The stock has lost 70 percent of its value from its high.

The drop prompted Goldman Sachs to call Pearson’s loan and sell 1.3 million of shares it held as collateral. That has put investors even more on edge, not helped by the company’s silence about whether the stock sale occurred during a blackout period, when executives can’t sell. It’s a mess that better board oversight could have prevented.

Published on Nov. 6, 2015

Valeant poised to cause much collateral damage

By Robert Cyran

Beware the collateral damage from Valeant. The acquisitive drugmaker’s travails have so far wiped out some two-thirds of its market value, vaporized fortunes of its investors, damaged reputations and dusted the pharmaceuticals industry with political radioactivity. The indirect effects could be even larger, as Valeant will incinerate belief in so-called platform companies, “adjusted” accounting and the genius of hedge fund managers.

valeant market cap

SMOKING ROLLUPS

Valeant’s intellectual underpinning was that it was a platform. Its market capitalization, which reached a peak of about $90 billion, derived not only from the assets it controlled, but also from management’s ability to buy companies, add them to the mix and enhance their collective value.

The success inspired several other drug rollups, including Mallinckrodt, Endo International, and Horizon Pharma. The combined value of the four companies swelled from about $20 billion to over $130 billion in just a few years. Copycats have proliferated in other sectors, including cable where Patrick Drahi’s Altice is hoovering up operators around the world. The Brazilian masterminds behind 3G Capital are doing it in beer with Anheuser-Busch InBev and food with Kraft Heinz.

Avago Technologies has joined the platform party in semiconductors while in chemicals, investors Martin Franklin and Pershing Square’s Bill Ackman went so far as to tout the strategy right in the name: Platform Specialty Products.

For these enterprises to succeed, bosses need to consistently identify good targets, pay a cheap price and manage the resulting assets effectively. Valeant failed on all three counts.

In August, it bought a barely effective drug for low sexual desire in women for $1 billion. Initial sales, when such “lifestyle” pills typically fly off the shelves fastest, indicate a glacial start. Valeant won an $11 billion bidding war for Salix Pharmaceuticals, which was embroiled in an accounting scandal. And Valeant Chief Executive Mike Pearson acknowledged recently, in response to a question about possible fraud at a subsidiary, that for a company the size of Valeant it’s “impossible to have full knowledge of everything at any one time.”

Some of the other platform companies are probably built on similarly shaky ground. Few have the patience required to succeed in serial dealmaking. It’s even harder when investors hunger for growth and executive compensation packages encourage an orgy of debt-driven acquisitions. Tightening credit markets, in particular, could expose the dependence on easy financing.

BRINGING TO ACCOUNT

Valeant’s profitability is mediocre. The company also has gilded the figures with non-standard metrics that omit important costs such as compensation, legal fees, and acquisition and integration expenses. Over the past nine reported months, Valeant earned $75 million using generally accepted accounting principles. Using the company’s self-created measures, it has generated a bottom line of $2.7 billion. The company-adjusted pro forma EBITDA estimates performed a similar optical trick with credit metrics when the company acquired rivals.

These puffed-up and pleasingly named “cash” earnings, and the stock’s steady upward progress, appealed to unsophisticated investors. Yet the myriad adjustments -Valeant’s quarterly results contain dozens of footnotes -also paradoxically lured some of the best minds on Wall Street. They convinced themselves that within the complexity was contained opportunity, and that the two sets of figures would converge once Valeant stopped making acquisitions.

Owners big and small are now cottoning onto the reality that at Valeant “one-time” charges have a habit of repeating themselves, amortization is a real cost in a business built on intellectual property and compensation comes out of the pockets of shareholders.

The valuations of many Silicon Valley startups – there are now 145 unicorns worth at least $1 billion apiece, according to CB Insights – and even many more mature technology companies also prefer non-GAAP figures that strip out stock compensation and other “non-cash” charges. They, too, could be in line for reappraisal.

WHEN GENIUS FAILS

The involvement of ValueAct Capital, one of the best activist funds, on the board acted as a seal of good housekeeping for Valeant. Other star investors piled in, and the great returns they made -Valeant’s share price increased more than 20-fold from 2008 to its height -encouraged still more to join in, turning the stock into a hedge fund hotel. The fall in Valeant’s stock has erased much of those returns, and left many late followers sitting on some ugly paper losses.

There’s nothing wrong with copying a good idea. The belief in Valeant, however, became pernicious group-think accompanied by hubris. Risk management suffered, as big investors took concentrated positions. Valeant’s stock accounted for almost of third of Sequoia Fund this summer, and the manager recently bought more. It wasn’t alone, as Ackman raised his stake to 9.9 percent last month. Ackman even held a conference call about Valeant in late October. About 10,000 people listened to him back the company for four hours. That’s more than twice as many as dialed into the company’s own defense a few days earlier.

Most specialized healthcare funds knew enough to avoid the carnage. They guessed correctly that Valeant’s model of slashing R&D and jacking up prices would result in shrinking prescription counts and pushback by insurers and politicians.

Pershing Square, Sequoia and other funds put their faith in spreadsheets and access to management instead. The numbers they inputted were overly optimistic. There’s little value in asking a CEO, “Is there any fraud happening?” as Ackman did of Pearson. A more cautious approach to the limits of their expertise would have served these investors well. It’s yet another worthwhile reminder for those who would believe in the supposedly smartest investors with a solid track record: past performance won’t always guarantee future returns.

 Published on Dec. 7, 2015

Valeant’s latest fix reinforces its challenges

By Robert Cyran

Valeant Pharmaceuticals’ latest fix reinforces its challenges. The drug company has appointed three executives to take the reins while Chief Executive Mike Pearson is on medical leave and three board members to oversee and guide them. The double triumvirate shows how reliant on one man Valeant has become.

Pearson, who has been hospitalized with a serious case of pneumonia, is the architect of the company’s serial-acquisitions strategy. This business model and Pearson’s leadership have come under intense scrutiny. Critics have attacked the company’s accounting, its stifling $30 billion debt load and its price hikes on acquired drugs. As a result, Valeant’s market capitalization has plummeted by 60 percent since August. This loss of faith by investors has forced the company to switch to integrating businesses, instead of buying new ones, and paying off debt.

The company’s prompt action in addressing Pearson’s illness by disclosing and appointing interim leadership is commendable. And there’s a good chance Pearson could be back shortly. But the structure is convoluted.

General Counsel Robert Chai-Onn, company Group Chairman Ari Kellen and Chief Financial Officer Robert Rosiello will share management responsibilities in a newly created Office of the Chief Executive Officer. The board has also created a committee to “oversee and support” the office of the CEO. This, too, comprises three members – lead independent director Robert Ingram, president of big stakeholder ValueAct Capital Mason Morfit, and former Chief Financial Officer Howard Schiller.

The company says this reflects Valeant’s non-traditional organizational philosophy. It relies on what it says is a deep bench of qualified executives working in areas of expertise rather than a traditional hierarchy with roles such as a chief operating officer. Chai-Onn has been at Valeant for a decade; Rosiello advised the company for eight years before joining the firm as finance boss. Moreover, the additional board oversight could augur better corporate governance if it leads to the company eventually separating the roles of chairman and chief executive.

Investors are more worried that this structure reflects the fact Pearson can’t be replaced easily, and the risk of executive and board infighting. These fears sent the stock down 10 percent on Monday morning. More turmoil is the last thing Valeant needs.

 Published on Dec. 28, 2015