Activist William Ackman, Valeant Investor, Tries Life as an Inside Man
After firing Valeant’s CEO, the investor has been defending the embattled drug company from outside critics
Valeant Pharmaceuticals International Inc. Chief Executive Michael Pearson was wrestling with a lot of problems in mid-March, but activist investor William Ackman wasn’t one of them.
The two men had remained allies even after the drug company’s slumping stock had dropped 51% on a single day, March 15. Mr. Ackman, a big Valeant investor, demanded to talk with the company’s directors. He insisted bankruptcy was a possibility and sought a board seat. He also told the board Mr. Pearson was the right person to turn around the company.
Within three days, Mr. Ackman had changed his mind, and the board got behind him. On March 20, with the board’s blessing, he phoned Mr. Pearson and fired him. The next morning, Mr. Ackman joined the board.
As an activist shareholder, Mr. Ackman makes his living tilting his spear at companies to agitate for change. After firing Mr. Pearson and pushing his way onto Valeant’s board, he now finds himself on the other side, defending a company under attack by dubious investors and others.
As recently as last August, Valeant ranked as the most valuable holding of his hedge fund, Pershing Square Capital Management LP. His stake was worth about $5 billion. Mounting questions about its drug pricing, growth strategies, debt and accounting drove the stock down 90%, leaving Mr. Ackman’s reputation as a shrewd investor as much on the line as the company’s future.
In his first few months as a company insider, Mr. Ackman secured backing from J.P. Morgan Chase & Co. Chief Executive James Dimon and other banks to avert defaults on Valeant’s bank debts. He wooed a new chief executive officer, Joseph Papa, wresting him from rival Perrigo Co. And he and his fellow board members spurned a takeover approach for the whole company from Japanese drug maker Takeda Pharmaceutica l Co. and private-equity firm TPG.
Early investor feedback was encouraging. Shares rose 7% on March 21, after Valeant announced Mr. Pearson was leaving and Mr. Ackman was joining the board, then 15% over the next two days. The stock rose another 8% after The Wall Street Journal reported the pending hiring of Mr. Papa. Mr. Ackman seemed to be putting a floor on the stock.
Since then, the outlook has grown cloudier, despite Mr. Ackman’s broad pronouncements about Valeant on Capitol Hill, on television and within the boardroom. Valeant shares now trade at about $27, around the same price as when Mr. Ackman joined the board.
This account of Mr. Ackman’s attempt to turn Valeant around is based on interviews with people with direct knowledge of the events as well as emails and other documents from a Senate investigation into Valeant’s drug pricing.
Former Valeant CEO Michael Pearson, shown at a Senate hearing in April, found out he was out of a job in phone call from William Ackman.
Former Valeant CEO Michael Pearson, shown at a Senate hearing in April, found out he was out of a job in phone call from William Ackman.PHOTO: JONATHAN ERNST/REUTERS
Mr. Ackman’s interest in Valeant began in early 2014 when a business-school friend introduced him to Mr. Pearson at a drug-industry conference. The company, based in Laval, Quebec, had won over investors with its creed that big drug companies spend too much on research and that the best way to grow was through mergers.
Mr. Ackman expressed admiration for Mr. Pearson’s relentless focus on boosting shareholder returns. The two men shared an appetite for deals. Mr. Ackman publicly lauded Mr. Pearson’s stock-heavy pay package as a potent incentive for growth and stock-price gains.
The two first worked together on an unusual joint bid to acquire Allergan Inc., the maker of Botox, with Mr. Ackman’s Pershing Square buying a substantial stake in Allergan and Valeant putting in a small portion. In the end, Allergan sold itself to Actavis PLC, which took the name Allergan PLC. Pershing Square and Valeant pocketed $2.6 billion on the Allergan stake.
Early last year, Pershing Square bought a stake in Valeant. Though Mr. Ackman typically picks companies he thinks need a shake-up, he selected Valeant as an admirer, not an agitator.
In February of last year, Valeant dramatically increased the price of two cardiac-care drugs. Two months later, it raised the prices of another pair of drugs used to treat a disease causing a copper buildup in the body, by as much as 5,700%. Hospital and doctor outrage over the cardiac-care increases triggered a political backlash that led last summer to Senate and other investigations of Valeant’s pricing practices.
A bigger hit to the stock came in late October when a short seller alleged that Valeant had secretly been using a mail-order pharmacy, Philidor Rx Services LLC, to inflate Valeant’s revenues. The stock fell 19% in a day, and Valeant said it would conduct an investigation. Philidor said it behaved properly.
In public, Mr. Ackman remained Valeant’s cheerleader. As the stock dropped, Pershing Square bought another two million shares. Mr. Ackman appeared in photographs at the post where Valeant is traded on the New York Stock Exchange.
Privately, he harbored doubts. In an Oct. 27 email to Mr. Pearson and other company officials, Mr. Ackman urged Mr. Pearson to hold a conference call to answer questions from investors and the media. “The torpedoes are in the water and the sharks are circling,” he wrote. “They will kill the company.”
Mr. Pearson was admitted to the hospital with severe pneumonia in the final days of last year, and he didn’t return to work until late February. In between, the company disclosed it would likely revise its financial statements because of $58 million in revenue related to Philidor.
When Mr. Pearson returned, Mr. Ackman sent him an email thanking him for his efforts. He also requested a board seat for one of his most trusted advisers, Pershing Square Vice Chairman Stephen Fraidin, which he got.
Negative guidance during a Valeant investor call on the morning of March 15, a Tuesday, sent the stock into a slide that sliced the company’s market value in half. That night, at 10:55 p.m., Mr. Ackman sent an email to Mr. Pearson. “Which directors should I speak to” about joining the board, he asked.
Chairman Robert Ingram invited him to make his case on Thursday about joining the board. There, Mr. Ackman expressed confidence in Mr. Pearson. He also tried to shake the board into action, asserting that bankruptcy was no longer a remote risk.
He passed on a rumor that Valeant’s largest investor, investment firm Ruane, Cunniff & Goldfarb Inc., was selling its position. (That turned out not to be true, though the firm did sell some shares.) If that news came out on Monday morning, Mr. Ackman said, the stock would plunge to the single digits. The bonds would start trading at 60 cents on the dollar, and Valeant would need to negotiate with investor funds known to be tough. They’ll send us into bankruptcy, he warned.
The board agreed to make him a director, starting that Monday.
That weekend, a special board committee reviewing the mail-order pharmacy Philidor told the board and Mr. Ackman that the performance-based environment at the top of Valeant was a problem, and it offered more details about Philidor.
Separately, Pershing Square staffers who were camped out at Valeant’s office had concluded that some employees were growing disenchanted with Mr. Pearson’s leadership.
Mr. Ackman figured he had a narrow shot at saving the company. He changed his mind about leaving Mr. Pearson in charge.
Two Valeant directors from activist firm ValueAct Capital Management LP already had been recommending to the board that Mr. Pearson be replaced. That Sunday morning the board decided to do that, and asked Mr. Ackman to make the call.
Mr. Ackman phoned Mr. Pearson and broke the news. Mr. Pearson agreed to help with a transition.
The following morning, Valeant announced the leadership and board changes, including the addition of Mr. Ackman. It also said the internal review had found problems with the culture and the tone at the top, but that no further financial restatements were expected.
The news release described a “performance-based environment at the company,” where achieving targets “was a key performance expectation.” The culture, it said, may have contributed to the accounting problems. It said Valeant would file its annual report in time to avoid default. The stock rose.
Mr. Ackman talked up the company in an April 6 conference call with his own fund’s investors. “We expect a fairly rapid recovery in the stock price, on the basis of restoring confidence in the business,” he said. “There’s enormous upside.”
Mr. Pearson gave Valeant’s board two suggestions for the new CEO. Mr. Papa at Perrigo was one of them.
Mr. Ingram, the board chairman, got a call one day from Mr. Papa, who wanted to know whether some Valeant assets were available to buy. Mr. Ingram countered: Would Mr. Papa be interested in becoming CEO?
Mr. Ackman invited Mr. Papa to his Midtown Manhattan office on a Saturday morning for a three-hour chat. Mr. Ackman talked up what he called the historic nature of the turnaround task ahead. He told Mr. Papa, who is 60 years old, that he could spend a few more years toiling at Perrigo and then retire, but that Valeant offered a new challenge, one that could make him a fortune.
Another selling point: Mr. Papa lived near Valeant’s New Jersey offices, but he had been commuting for a decade to Perrigo’s offices in Michigan.
Late last month, two days after the board announced Mr. Papa’s hiring, Mr. Ackman testified at a Senate hearing about the company’s drug-pricing practices. He was grilled about how much he knew about the company’s price increases.
“I regret that we did not do more due diligence on pricing at Valeant, I mean, for sure,” Mr. Ackman said.
He told senators that the drugs whose prices had increased represented a small portion of Valeant’s business. Susan Collins, a Maine Republican, challenged the assertion, pointing to data that show the four drugs under discussion exceeded 20% of Valeant’s net income in January and February—a figure the company says is earnings before interest, taxes, depreciation and amortization.
Asked what policy changes he would recommend on drug pricing, Mr. Ackman responded: “I think we can make it easy by just giving a 30% blanket price reduction” on the cardiac-care drugs, a move that would expand on Valeant’s 30% rebate program for some buyers. He said he had just texted Valeant’s chairman asking for a phone call the next day to discuss the issue and his recommendation.
Mr. Ackman hadn’t previously floated that idea before the board. More than two weeks later, Valeant announced that it was expanding its rebate program but not as much as Mr. Ackman had suggested.
At the hearing, Mr. Ackman also told senators that “a lot of the board is going to turn over,” though decisions on directors weren’t yet final.
Two days later, Valeant announced that Mr. Papa and three others would join the board.
The board had wanted a doctor who could help with relationships in its core dermatology segment. Mr. Ackman suggested Amy Wechsler, a Valeant consultant, dermatologist and psychiatrist focused on the connection between skin and stress.
She has been an adviser to beauty-products giant Chanel, has appeared on the “Today” show and the “Dr. Oz Show,” and is author of the book: “The Mind-Beauty Connection: 9 Days to Less Stress, Gorgeous Skin, and a Whole New You.” Mr. Ackman has been a patient.