The Valeant way: Michael Pearson's two-year top 15 route march
This article was originally published in Scrip
Valeant Pharmaceuticals has made 29 acquisitions in the past three years. It has already spent $1 billion in 2012 buying companies and assets. But to fulfil its ambition to be in pharma's top 15 within two years, it needs to triple its valuation. Valeant chairman and CEO Mike Pearson talked to Scrip's Eleanor Malone about the route plan for that journey.
Mike Pearson, chairman and CEO of Valeant Pharmaceuticals
Michael Pearson is very clear about what he wants Valeant to become. "Our aspiration is to be a top 15 pharmaceutical company in terms of equity value: our market capitalisation. That means we'll have to increase our share price. And we'll do that by growing cash flows from the company."
And he is clear about when he wants this to happen: "We've set an objective of end of next year. If we don't make it by then, would expect it to be as soon thereafter. We don't see this as a 10-year journey: it's a two-year journey."
But it is a big ask, even for a company growing as fast as Valeant. As of 2 July, the firm's roughly $14 billion market capitalisation puts it 21st among pharma companies. But it would have to increase its valuation some two and a half times to overhaul the current 15th placed firm, Biogen Idec (on $34.76 billion).
The more predictable part of Valeant's journey is that it will continue on its acquisition trail through a slew of relatively small accretive deals. But Mike Pearson doesn't rule out a larger deal (like its 2010 merger with Biovail):"We're open to it," he says, "But we have a big focus on creating shareholder value and what we don't want to do is get into a public auction."
Valeant would look hard even at deals that exceed the company's annual acquisition budget – of $2-3 billion – if it made sense, he said. "If the other firm's balance sheet helped to fund it, [...] we'd be interested. We'd be more interested in a merger of equals than a straight acquisition because of the premiums involved in a public company acquisition."
Meanwhile, Mr Pearson insists that organic growth is still a major focus despite all the acquisitions: "Organic growth is a key driver. It's very, very critical…we continue to measure organic growth of all units, and we measure them both with and without the acquisitions."
The Valeant philosophy
Mike Pearson joined Valeant in 2008 after a career at McKinsey, a consulting background which nurtured an unsentimental approach to business. Other biopharma companies may pledge to address areas of unmet medical need, or foster excellence in R&D, or serve some elevated goal. But Valeant is transparently straightforward. Its approach is logical and business-minded, and its primary goal is to grow the business in order to generate returns for shareholders.
For Mr Pearson, there are three key differences between Valeant and most other pharmaceutical companies: "Cost structure, discipline in buying assets and how quickly we integrate companies".
Strict discipline and a lack of sentimentality inform decisions at all levels. Valeant is run at low cost, headcounts are restricted, facilities basic and expenses policies minimal.
Acquisition is a business at Valeant, something to be conducted with discipline and without sentimentality. "We have an internal mantra at Valeant," says Mr Pearson. "We do not fall in love with any asset. Whether it's one we're looking to buy or one we already own. We will walk away if the price is too high."
And it is the same for divestment, he says. "Everything is for sale, if somebody is willing to pay a price for it that is higher than we believe we can generate in terms of returns of our shareholders. If a product or geography does not make sense in the longer term, we're willing to divest."
There is little sentimentality about the corporate cultures of acquired entities. Valeant is the python that swallows and digests its acquisitions rapidly. It stamps its corporate culture on the incoming groups immediately: "With a lot of mergers, everyone's trying to create a new culture, or comparing processes and practices and try to take the best," says Mr Pearson. "We don't bother doing that. When we acquire someone, it's the Valeant way. And that allows us to do things much, much more quickly."
Hence also all acquisitions are fully handled, from negotiations through to integration, by the relevant business unit, enabling the firm to digest numerous purchases simultaneously.
Strict adherence to a rational, returns-generating mission also characterises the choice of acquisitions and the business model.
Mr Pearson is not interested in investing in R&D because he believes it is too much risk, risk which in turn increases the cost of borrowing. (The company does have some R&D but it usually comes with an acquisition of marketable assets rather than informing the reason for that acquisition). By concentrating on "safe" assets that are already marketed and generating returns, with a broad level of diversification, together with a "tax-efficient corporate structure" and low capital base, the company can raise more debt than a typical pharma firm, enabling it to pursue its hyperactive acquisition strategy.
Valeant Quick Facts
Market capitalisation (2 July 2012): $13.75 billion
2011 revenue $2.5 billion (up 28% year on year)
2012 revenue guidance $3.4-3.6 billion
2011 free cash flow $866 million (+19% year on year)
2012 adjusted cash flow from operations guidance >$1.4 billion
HQ: Montreal, Canada
International presence: speciality pharma (US, Canada, Australia, New Zealand);
branded generics (Central and Eastern Europe, Latin America, South East Asia and South Africa)
>500 products sold
Another Valeant strategy is to operate in markets that are unrestricted either by reimbursement or by the presence of dominant large companies. Thus Mr Pearson favours speciality markets like dermatology or ophthalmology and products, markets that are 'niche' enough not to attract serious competition from big pharma.
Mr Pearson also highlighted the firm's recent entry into the dental market (with its deal to buy Orapharma; scripintelligence.com, 15 June 2012) and podiatry (through the purchase of Pedinol Pharmacal; scripintelligence.com, 13 April 2012). "There will be others," he said, although he was not willing to name which he has his eye on.
He also prefers self-pay markets to government reimbursement. And geographically, Valeant's focus is on emerging markets, but not the monsters like China or India because all the largest pharma companies are trying to play there, too.
Valeant already has a direct presence in Brazil and Mexico in Latin America, and in Hong Kong, Malaysia and Philippines in South East Asia, and Mr Pearson highlighted Colombia, Chile and Ecuador as well as Indonesia and Vietnam as markets that he is keen to enter.
The Middle East North Africa (MENA) region also appeals: "We do like those markets, and you shouldn't be too surprised if we do get into those as well. You have to be in Saudi Arabia – it's a bit of an anchor, then there's a number of others," Mr Pearson declared.
But Valeant will avoid markets like Venezuela or Argentina "because we're worried about sustainability and political stability."
And Mr Pearson also rules out Turkey, at least for the time being." It's the one Central and Eastern European market that we're not in. In Turkey I worry about pricing. In some ways it's a great market but a lot of the pharma market there is government-reimbursed, which we don't particularly like. And they do have a track record there of making some pretty draconian price reductions over the last few years. It's also an area that a lot of larger pharma companies are focused on. Those three factors are the reason we're not in there today."
To hear Michael Pearson speak in more detail about the company's deal funding, cost control and acquisitions budget, listen to part 1 of the podcast. To hear him talk about strategy and execution, and the areas he would like to get into, listen to part 2. In part 3, he discusses how Valeant differs from other pharma companies, and describes what he sees as the fundamental problem of R&D investment at big pharma.
Recent acquisitions by Valeant Pharmaceuticals International
up to $114m
Swiss Herbal Remedies assets
AcneFree and other assets from University Medical Pharmaceuticals
yes, not stated - revenue target based
Atlantis Pharma assets
branded generics - gastro/analgesic/ anti-inflammatory
Natur Produkt International
OTC incl cough and cold products
Gerot Lannach assets
Austrian firm with sales mostly in Russia/CIS
branded generics incl low-dose aspirin
up to $20m
Minority stake in Pele Nova Biotecnologia
Tissue regeneration, biologics, wound healing
yes, but not stated
Sports nutrition and food supplements
Australia, NZ, SE Asia, S Africa
Rx/OTC brands incl weight loss, cough and cold products
A$75m based on pipeline activities, product registrations, overall revenue
Afexa Life Sciences
OTC brands incl cough and cold
Lithuania (selling in central/eastern Europe & Russia)
Dermatology, ophthalmology, hospital injectables
Product rights: Cholestagel (from Genzyme)
up to $7m
Product rights: Zovirax (from GSK)
non-ophthalmic topical formulations
Swiss firm selling in central/eastern Europe, Greece, Israel
Branded generics, OTC
Skin care brands (Hamilton's)
merger completed (agreed in June)
Ophthalmology and orphan indication
Bunker Industria Farmacêutica
R$97m (about $56m)
Instituto Terapêutico Delta
Branded generics/OTC, esp dermatology
Laboratoire Dr. Renaud
Dermatology assets (Blaufarma)
Polish company - central Europe
dermatology (Rx & cosmetic)
Private Formula International Holdings
Valeant common stock
Failed acquisitions: ISTA Pharmaceuticals: offered $6.50 [total $314m] then $7.50 (possibly up to $8.50) per share; withdrew offer January 2012.
Lost Cephalon to Teva in 2011
Divestment: sold generic dermatology products to Mylan in February 2012