Investment idea generation.

Blog

Our thoughts.

Mike Pearson Forced Out At Valeant?

Valeant Pharmaceuticals (NYSE: VRX) has been under pressure for the last few months thanks to the media and regulators, and we’ll throw Andrew Left in there as well, all about the accounting and pricing. The company has CEO Mike Pearson is on medical leave. The interim management, or management by committee as they’ve labeled, could be a net positive at VRX — although it signals an end to the strategy that got the stock to $260 a share.

VRX under scrutiny

VRX was a thriving drug manufacturer until recently — specifically, in October when the stock came under scrutiny for a number of financial management issues. In the first three-quarters of 2015, the stock was up 27%, however since the beginning of October, the stock is down 43%. 

As the stock rose, Michael Pearson, VRX CEO was praised for his strategic management, which included a focus on value through distribution and acquisitions. However, near the end of the third quarter 2015, the company started getting questioned about its aggressive drug pricing, specifically for newly acquired drugs. That eventually further led to questioning of the highly leveraged acquisition strategy and undisclosed relationship with online pharmacy, Philidor.

Activist defense of VRX

While the company’s stock price has been substantially declining due to current questioning, Bill Ackman and his Pershing Square Capital Management, as well as Ruane Cunniff / Sequoia have defended the company, maintaining their stakes. Both investors have noted they see significant earnings growth potential for the firm despite the questions and regulatory inquiries. Bill Ackman currently holds 8.5% (after selling off a few shares on Dec. 31 for tax reasons) and Ruane Cunniff holds 11%.

I took Ackman's defense of Valeant to task here

Transparency a heightened issue at Valeant

Given the recent company events that have unfolded, Michael Pearson’s medical leave announcement may or may not be all that surprising. It’ll definitely have some material impact on the company given he was the visionary. The interim management structure during Michael Pearson’s medical leave will include a team of three executives known as the Office of the Chief Executive Officer. The board of directors has also created a three-person committee to support the interim CEO executives. 

Some speculators report that the CEO office structure could prove to be ineffective given the difficulty in divvying tasks and the uncertainty surrounding specific management responsibilities in these types of situations. In Valeant’s case, however, the opposite could also be true given the company’s need for increased transparency of its financial activities.

In recent trading the market has reacted unfavorably, pushing Valeant’s stock down below $100 a share, a decrease of more than 10% since the Dec. 28 announcement — part of that driven by the fact that Ackman sold some shares. 

Given the formation of a CEO office it seems that Pearson’s medical leave will likely not be short-lived and is an easy way to push him out. Valeant is still offering positive guidance for the future. However, its focus on improved accounting methodologies and transparency will be key overhangs in the first half of 2016. The big questions that I can’t fully wrap my head around is the ultimate impact of further political pressure on drug pricing and the ultimate fallout of Philidor — in terms of VRX’s true exposure in terms of sales.