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Can A New CEO Remodel Valeant Pharmaceuticals?

Posted by Joseph Tanador | May 10, 2016

Embattled Valeant Pharmaceuticals International Inc. announced on Wednesday, April 27 a multimillion-dollar employment agreement for its new CEO, Joseph “Joe” C. Papa.

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Four news directors will also join the company’s board. Documents filed with the SEC state that if the company’s stock returns to October 2015 levels of US $150 per share, he could make about US $100M, while he will make more than US $500M in stock awards if the company’s stock hits US $270 a share.  

A Slew of Scandals

After Martin Shkreli of Turing Pharmaceuticals made headlines for increasing the price of Daraprim from US $13.5 to US $750 (an increase of 5,000%), officials began to notice other companies doing the same thing. Valeant came under fire for their increase of the prices of the Isuprel and Nitropress drugs, acquired from Marathon Pharmaceuticals in February 2015. After the acquisition, Valeant increased the prices of these drugs by 525% and 212%, respectively. In 2015 alone, the company increased its drug prices by an average of 66%. This year, prices on 16 of its products were increased.

Officials Admit Mistake Increasing Drug Prices

In a Senate hearing last month, Valeant’s outgoing CEO Michael Pearson said the company was too aggressive in raising the prices of some of its drugs. He mentioned that the company’s strategy of buying and increasing prices on many drugs was a mistake. Mr, Pearson also said that competition from cheaper generic versions of heart drugs Isuprel and Nitropress prompted the company to increase its prices. Valeant board member and activist investor Bill Ackman also stated in the hearing that he will hold a conference call with other directors, recommending that the company drop the prices of two heart drugs by at least 30%.

Valeant’s Performance

Since last summer, Valeant has lost 90% of its value. It is facing more than US $30B long-term debt and its failure to file its annual financial report on time could face default from its bondholders. Valeant cut its 2015 annual revenue forecast by around 12%, at US $11B to US $11.2B (previously estimated at US $12.5B to $12.7B).

Could Mr. Papa’s Credentials Help Valeant Reshape?

Valeant desperately needs a CEO that can help solve its many challenges including probes of its accounting and business practices, a ballooning debt and a slumping stock. The company announced on April 25 that it named Joseph C. Papa as its new Chairman and CEO. Expected to join in May, he will succeed J. Michael Pearson. The 60 year-old CEO of Perrigo since 2006 also held management positions in several pharmaceutical companies including DuPont Pharmaceuticals, Novartis, Watson Pharmaceuticals, and Cardinal Health. He led the tax-inversion deal with Elan in 2013 that helped drove Perrigo’s market value more than US $20B. Shares of Perrigo, however, fell about 40% over the last year and its 2016 first-quarter sales did not meet analysts’ estimates. Regardless of this, the Chairman of Valeant’s Board Robert Ingram said "The Board has conducted a thorough search process and believes that Joe is the ideal leader for Valeant at this time. He has a strong shareholder orientation, a background in science, and an unmatched track record of accomplishments.” Analysts from top firms also shared different sentiments on Joe’s appointment. Pembroke Consulting’s President Adam J. Fein said “I think he has a lot more credibility with payers, certainly than Mr. Pearson does. My sense is it’s a very solid pick.” An analyst for Raymond James said  Mr. Papa is "nice guy to counter Valeant's bad boy reputation.” An analyst for Wells Fargo said “We believe the new CEO has experience acquiring, but not restructuring companies.”

The key challenge Mr. Papa faces is to restore the confidence and reputation of Valeant. Achieving the US $270 a share and reestablishing trust with insurers and pharmacy-benefit managers will highly be unlikely until he determines the company’s clearer new growth path.

 

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