Valeant Pharmaceuticals Intl is in the news again today! Matt Levine as usual has a great article but if you want to read what the sell-side is saying (those who have not yet thrown in the towel) below is a summary. As usual, Umer Raffat of Evercore ISIS has the most insightful commentary on this saga.
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Valeant Pharmaceuticals Intl – sell-side reactions
Overall, we see the changes as steps in the right direction. Departure of CEO Mike Pearson marks the end of a transformative era at Valeant that had much broader ramifications. We see Mr. Pearson as a pioneer outsider who was able to successfully take advantage of the inefficiencies in his industry. Valeant’s exceptional performance during most of his tenure as CEO forced his peers in the Pharmaceutical industry to become more efficient, in our view. Many other CEOs since have attempted to emulate parts of his strategy. However, we believe that Mr. Pearson was simply too aggressive and underestimated the risks to his decisions (e.g., Philidor, Marathon, and other pricing-related deals), and that ultimately led to the current crises. Mr. Pearson, as the hands-on CEO he was, bears the ultimate responsibility for those decisions. Moreover, we believe Mr. Pearson’s blunt communication style made him, and by extension Valeant Pharmaceuticals Intl,vulnerable to attacks from short sellers, the media and politicians. After recent inconsistencies in financial targets and the uninspiring 4Q15 earnings call, the argument for replacing him was stronger. The final strike may have been the downgrades after the 4Q15 call, questioning management credibility. Mr. Schiller, as the former CFO, facilitated the execution Mr. Pearson’s decisions, and, according to Valeant now, is responsible for “provision of incorrect informationto the Committee and the company’s auditors, [that] contributed to the misstatement of results.”
Our view: Valeant Pharmaceuticals Intl announced this morning that its board is searching for a successor to current CEO Mike Pearson, who will stay on until a replacement is named. Additionally, Pershing Square’s CEO William Ackman will join the board and we anticipate he will attempt to extract as much value as possible from current Valeant Pharmaceuticals Intl assets.
Top-level changes puts Pearson out, Ackman in: Michael Pearson will be stepping down as CEO, but will act in the role until a successor is appointed. While the decision did not come with mutual agreement, the move is probably best for Valeant Pharmaceuticals Intl’s future at this point. As such, the Board has initiated a search for his replacement (timing uncertain). Further, Pershing Square CEO William Ackman has joined the board, replacing Katharine Stevenson who has voluntarily resignedto create a vacancy (board remains at 14 members). We think this likely signals a greater likelihood of meaningful asset divestitures than the “non-core” divestitures previously cited. In connection with the previously announced financial misstatements (see below), the board has requested that former CFO Howard Schiller tender his resignation, but in disagreement with the characterization, he has not done so and instead placed the Corporate Controller on administrative leave. Though additional remedial measures are likely, these first personnel changes are necessary to move VRX to a path of recovery.
This morning, Valeant Pharmaceuticals Intl announced that CEO Mike Pearson will be stepping down and provided more clarity on its ongoing 10-K filing delay. Overall, we believe Mr. Pearson’s departure as CEO had become a matter of “when” not “if” following the sharp decline in shares and investor confidence in the story over the past month, and we will closely watch the direction the Valeant Pharmaceuticals Intl board takes the company with his successor (we believe asset sales become a real possibility as the company looks to accelerate its de-levering). In the near term, Valeant also updated its progress on its delayed 10-K, which the company is targeting to file before April 29, 2016. Issues with the 10-K still appear to be largely contained to Philidor related revenue recognition in late 2014/early 2015. We believe this would be viewed as a clear positive for shares if this remains the case and the company is able to file by late April.
In our view, selecting an outsider with extensive industry experience as Pearson’s successor would enhance Valeant’s credibility. Our top choice would be former Allergan Inc. CEO David Pyott, though we recognize that he might not be interested in taking on a public company CEO role at this time. We also view current Allergan Plc CEO, Brent Saunders or Executive Chairman Paul Bisaro as strong potential candidates, as well former Allergan Inc. president Doug Ingram and former Hospira CEO Michael Ball. We also note that recent press reports (e.g. The Wall Street Journal, 12 March) have identified Warburg Pincus Managing Director Fred Hasan and former Sanofi CEO Chris Viehbacher as potential candidates. We believe the naming of any of these potential candidates as Pearson’s successor would enhance Valeant’s credibility
We view this morning’s Valeant Pharmaceuticals Intl press release as a positive for the stock and expect investors to gain more comfort with the name as the company starts to atone and move forward. Perhaps the biggest uncertainty after last week’s preliminary 4Q15 call was whether Michael Pearson would remain CEO; Pearson had success in driving unprecedented share appreciation, but recent revelations raise questions regarding the foundations of that growth.
VRX’s intention to file its 10-K on or before April 29 removes a significant overhang for investors; the company’s efforts to move forward in executing an amendment show management is leaning towards abundant caution—perhaps indicative of a “new” VRX. The Ad Hoc Committee’s statement resolves some of the uncertainty that led to the 10-K filing delay; with Philidor in the past we believe the company will assert additional controls around financial reporting which would mitigate concerns around future delayed filings.
We are still awaiting the final results of the Ad Hoc Committee’s review; however, additional commentary was provided by the company today that causes us to pause. Most alarming was the Committee’s concerns relating to certain accounting issues, the “tone of the organization”, and the performance-based environment that may have pressured management to meet unrealistic performance targets. Further, the company intimated that “improper” conduct of the former CFO and Corporate Controller resulted in the provision of incorrect information to both the Ad Hoc Committee and the external auditors, which contributed to the required financial restatements. After conducting 70 interviews and a comprehensive review of related documents, the Ad Hoc Committee has determined that certain other accounting issues also require review. The final conclusion of all matters is currently in process and is the chief reason for the delayed 10-K. In addition, the former CFO was also asked to resign as a Director, but has not yet done so.
And this is where there it gets interesting:
a. Company’s former CFO (Howard Schiller) and former Controller are being held responsible ? “improper conduct”
b. Press release says they provided “incorrect information to the Committee and the company’s auditors”
c. As per press reports, Howard Schiller appears to be denying any improper conduct
When I read this last line about incorrect information being provided to auditors, it seems that the ad hoc committee is effectively absolving both itself and the auditors. Presumably, this condition may be an important step in making PwC comfortable with signing off the 10-K. The press release talks about how the Company expects to file by Apr 29th (important deadline from covenant perspective – unless they can successfully renegotiate). What remains unclear is whether PwC would like to see the full ad hoc committee investigation conclusion before it gets comfortable signing off.
Before I conclude, I thought it may be relevant to paste this transcript excerpt – back in October when Philidor issues first came up, I asked Howard why he had moved on from CFO role earlier in 2015:
<Q – Umer Raffat>: Howard, good to have you back on the call, and I have one for you and this may not be the most comfortable question, but I feel like a lot of us outside of Valeant, including me, haven’t really figured out your sort of decision-making process behind moving on. And I know you went over your rationale previously, but I feel like no one’s satisfied and I keep getting that question from many investors in many meetings. So, would appreciate all your input there. Thank you.
<A – Howard B. Schiller>: Well, Umer, maybe the first time ever I’ve been accused of being vague, and so I’ll just repeat what I’ve said to you and others is that I had a desire after 30 years – two careers and 30 years to do some things on my own, and the timing was right. And again, just to be absolutely crystal clear, if I had – and which I’m guessing, it could be an undertone of the question, if I had any concerns whatsoever about Valeant or Mike I would not have stayed on the board. It’s as simple as that. And when we announced that I was leaving, and Mike and I had a bit of our love fest, I don’t want to repeat all the words, but I meant them in terms of Mike is professional, his ethics, his work ethic, his commitment to doing the right thing. So, hopefully, that’s clear.