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 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:
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Cut spending on
research and development.
-
Spend instead on
acquisitions with proven products that will add to earnings, and
cut expenses.
-
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.
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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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