Valeant CEO Mike Pearson. (Portrait by Kevin van Paasen/Bloomberg)
In 2015, Mike Pearson saw the company he’s cannily built over the past five years reach a new high: Valeant Pharmaceuticals International surpassed Royal Bank of Canada as the largest Canadian company by market cap—with a value of $111.6 billion. Fuelled mainly by acquisitions, Valeant has grown at a clip previously unheard of for Canadian companies. Critics say the firm isn’t focused enough on organic growth, and since those giddy chart-topping days in late July, the share price has declined: Valeant no longer holds its No. 1 position. But industry watchers still worship Pearson, Valeant’s 55-year-old CEO. In a short time, Pearson has made his investors—and himself—very rich.
Under his guidance, Valeant Pharmaceuticals has become a serial acquirer—in 2014, it bought 20 companies—largely focusing on firms that specialize in over-the-counter therapeutic treatments. Investors who bought Valeant shares five years ago, when Pearson took the reins, would have realized a return of 1,541% at that July peak. So it’s probably not surprising that despite a recent tumble in its share price, Pearson remains unfazed by critics. “A lot of companies that are successful in the long term try to do things a little differently [and] get a lot of criticism,” Pearson said in an interview in August. “It’s just the nature of things. Having critics doesn’t necessarily mean you’re wrong.”
Valeant’s spectacular returns have attracted high-profile investors like hedge fund manager Bill Ackman, who admiringly described Pearson as an “outsider CEO” in a 2014 note to shareholders. Ackman’s Pershing Square Capital teamed up with Valeant to mount a failed hostile takeover of rival pharmaceutical company Allergan, and at the time, the famed fund manager credited Pearson for being able to spot opportunities where others couldn’t, much like business legend Warren Buffett. Pearson himself downplays the suggestion that his approach is noteworthy: “Many companies are products of acquisitions that are super well-regarded,” he says, citing examples that include Procter & Gamble, Johnson & Johnson, and Novartis. “All of these companies basically have the same strategy we have. Probably what makes us different is we’ve been quicker than these companies. We haven’t taken decades and decades.”
Pearson began his career as a consultant for McKinsey & Co., where he worked for 23 years, having landed a job with the prestigious firm right after graduating from his MBA program at the University of Virginia. The London, Ont., native doesn’t talk much about his early days, but Robert Rosiello, a colleague of Pearson’s from his time at McKinsey and Valeant’s current chief financial officer, says getting hired straight out of college was an impressive feat. “You don’t get recruited at McKinsey without having top marks.”
In 2007, Valeant contacted Pearson, who’d been doing a lot of work with the pharmaceutical industry, to help turn around the struggling company. Its strategy of developing blockbuster drugs to treat serious illnesses wasn’t working out, and Valeant was losing money. The advice Pearson gave set the company on a new course. He told the executive team and board that they were setting themselves up for failure by chasing cost-intensive products, like cancer treatments, and in crowded markets without having adequate resources. The board was so impressed with Pearson that in 2008 they appointed him CEO.
One of the first things Pearson did as CEO was merge Valeant with Biovail, another troubled drug maker, and move its headquarters to Laval, Que., to take advantage of Canada’s more favourable corporate tax regime, a move analysts still applaud. Valeant is officially a Canadian company, but its administrative side is run out of offices in the suburban township of Bridgewater, N.J.
Building on the advice he gave as a consultant, Pearson continued searching for companies to acquire in high-growth, low-competition sectors, finding profitable niches in ophthalmology, dermatology and gastroenterology. In 2013, he bought Bausch & Lomb for $8.7 billion—a key acquisition that reflects his preference for companies with mature products that don’t require extensive research and development.
Valeant’s apparent lack of interest in R&D has drawn concern from some analysts and industry observers, who say research and development is the most important expenditure for pharmaceutical companies. Some, like Veritas analyst Dimitry Khmelnitsky, suggest that Valeant’s debt levels and cash flows are unsustainable without near-constant acquisitions: “Valeant’s organic revenue growth disclosures thus far have been piecemeal, inconsistent and confusing,” wrote Khmelnitsky in a note from 2012. Still, 80% of analysts have a Buy rating on Valeant, and some argue the company is already funding innovation, just in a different form: “The company is effectively ‘outsourcing’ R&D by acquiring companies with late-stage, early-growth assets instead,” writes Nomura analyst Shibani Malhotra. “This approach rewards smaller R&D-focused companies and their investors, which we argue leads to increased capital flow toward pharmaceutical R&D in general.”
Pearson says the criticism of his company is overly simplistic. It isn’t that Valeant doesn’t care about innovation, he says on the phone from New Jersey. He just isn’t going to dump money into projects he doesn’t think have a good chance of succeeding. Valeant’s playbook has focused on acquiring companies that produce lower-risk over-the-counter medicines that won’t gobble up tremendous amounts of capital to launch.
He compares his approach to Apple in the 1980s, when IBM was outspending the company by $1,000 to every dollar. Apple founder Steve Jobs made a remark that stuck with Pearson: “He said, ‘Look, it’s not how much you spend—it’s the quality of the idea and the quality of the people. That’s what makes the difference,’” says Pearson.
“Maybe the question I’d be asking the critics is why do other companies have to spend so much on R&D?” Pearson is keen to talk about the company’s organic growth, citing the potential of Valeant’s expanding portfolio (its top 20 products account for 30% of sales, he says). But it’s clear he hasn’t stopped shopping for acquisitions. He recently returned from a business trip in Buffalo, N.Y., where he was looking at a company worth a paltry US$8 million.
“We like buying companies or assets that have some hair on them, which means you get them at a somewhat lower price. And then we work really hard to clean them up as well as possible,” he says.
Lately Pearson has been looking to colonize new ground, gambling with experimental treatments for what he hopes will become a larger payoff. Two days after the FDA approved Addyi, the first medication to treat female sexual dysfunction, Valeant bought Sprout Pharmaceuticals, the makers of the treatment.
In September, the company’s stock tumbled following days of negative media coverage around the pharmaceutical industry, practice of dramatically raising prices on drugs soon after purchasing the companies that make them. American presidential nominee Bernie Sanders and other Democrat members of the House Committee on Oversight and Government Reform have demanded Pearson be subpoenaed to explain a decision in February of this year to boost the cost of two heart drugs, Nitropress and Isuprel, by 525% and 212% respectively, on the same day Valeant bought their parent company, Marathon Pharmaceuticals. The company has responded with statements saying that it’s not as dependent on drug price increases as critics have claimed; it has also pointed out that while attention has focused on changes in list prices for drugs, those prices don’t reflect the actual cost for insurers, governments and other group purchasers, which typically receive discounts that aren’t publicly disclosed.
The company may be facing headwinds, but don’t count Pearson out: “Our job is to prove our critics wrong but not through words, through actions,” Pearson says. “We just have to keep performing—we’re quite confident we’ll be able to do that.”
