In just two years, Valeant Pharmaceuticals International’s Chief Executive J. Michael Pearson has done something his predecessors weren’t able to do—make Wall Street happy.
Aliso Viejo-based Valeant’s shares are up some 40% so far this year with a market value of about $3.5 billion. This after a 40% gain in 2009.
Prior chief executives, including Pearson’s predecessor Timothy Tyson and founder and longtime boss Milan Panic—who established Valeant as ICN Pharmaceuticals Inc.—came under fire for slowing growth, and, in Panic’s case, autocratic rule.
Pearson has curried the favor of analysts and investors through a mix of cost-cutting and targeted buys of smaller drug companies.
“It is time for us to concede that the run in the stock is no fluke and that investors are likely to view this management team with increasing confidence given its execution over the past one to two years,” said analyst David Amsellem of Minneapolis-based Piper Jaffray & Co. in a research note.
Pearson said he feels Valeant is satisfying Wall Street’s desire for growth.
“We have a very nice growth rate now,” Pearson said. “Last year, we grew. And this year, so far we’re growing, both through acquisitions and organically.”
Valeant posted a first-quarter adjusted profit of $52.8 million, up 39% from a year earlier. Revenue rose 30% to $232 million.
The results beat Wall Street expectations of a $49.4 million quarterly profit on sales of $224.7 million.
In the past two years, Valeant, which has yearly sales of about $830 million, has made 15 deals to buy drug makers or products in a bid to build business in its target markets.
A 16th deal—a $318 million buy of Aton Pharma Inc. of Lawrenceville, N.J.—hasn’t yet closed.
Aton focuses on eye drugs and “orphan drugs,” which are used to treat rare medical conditions.
Valeant targeted Aton to help shore up revenue, which could take a hit after generic versions of its epilepsy drug Diastat are expected to hit the market later this year, said William Tanner, an analyst for Lazard Capital Markets LLC, in a note issued after the deal.
Diastat accounts for $50 million to $60 million of Valeant’s annual sales.
Skin Drugs
Most of Valeant’s recent deals have been for skin drugs.
“Dermatology, we think, is a very attractive area for us to continue to grow as a smaller company,” Pearson said.
Skin drugs carry less development risks and don’t require a big sales force in order for Valeant to compete with larger players, Pearson said.
The growth strategy has garnered interest and caution from analysts.
Analyst Michael Tong from Wells Fargo Securities LLC has an “underperform” rating on the stock, but said flawless execution of more deals could bump up his rating.
Valeant is buying companies in its six core markets: the U.S., Canada, Brazil, Australia, Mexico and Central Europe—Poland, the Czech Republic and Slovakia.
The six markets offer different opportunities for the company, according to Pearson.
Customers in Brazil, Latin America and Central Europe buy “branded generics”—generic drugs that are bought by customers because of the familiarity of the products.
Those markets, in growing economies, offer expansion prospects for Valeant.
“Pharmaceuticals are still a relatively nascent industry in those countries,” Pearson said.
The U.S., Australian and Canadian markets are more suited to Valeant’s specialty pharmaceuticals, including dermatology and neurology drugs.
Valeant is being careful to not expand too quickly, Pearson said.
When the company operated as ICN under Panic, who was ousted by shareholders in 2002, it took heat from investors for being too disparate.
At the time, Valeant had operations in nearly 80 countries.
Pearson sold many of Valeant’s far-flung operations soon after he took over as chief executive. Despite recent expansion, he said the company is restricting where its drugs are sold.
“We’re not going to go back into Western Europe,” he said. “ICN was in Asia—we’re not in Asia.”
More Buys
Valeant had $147 million in cash and equivalents at the end of first quarter and will be looking to buy more companies, according to Pearson.
“We’ll be looking for smaller, sort of ‘tuck-in’ acquisitions and we would expect to certainly do a few more by the time 2011 rolls around,” he said.
Valeant’s strategy is to focus on small buys and diversified drugs, avoiding too much reliance on a single drug, Pearson said.
The company, which has about 125 workers in Orange County and 3,200 companywide, has one potentially big drug in development—epilepsy treatment retigabine, which is under review by the Food and Drug Administration.
Valeant signed a development and marketing deal for retigabine with Britain’s GlaxoSmithKline PLC in 2008 that eventually could be worth more than $800 million in payments to the drug maker.
But Valeant won’t have another retigabine-size drug as long as he’s in charge, Pearson said.
For Valeant, going with specialty niche drugs is less risky because their success is more in the hands of management rather than in the hands of science, he said.
“I’m not a scientist,” Pearson said. “I’d rather bet on things I have a little more control over.”
Pearson, who holds degrees from North Carolina’s Duke University and the University of Virginia, was a turnaround specialist with McKinsey & Co. before coming to Valeant. He replaced Tyson, who’d been chief executive since 2005.
Outside the office, Pearson, a native of London, Ontario, spends about half his time outside California. He said he enjoys reading, golf and exercise.
“Although you can’t tell if you look at me, I do like to try to exercise,” he said.
Pearson splits his time between New Jersey, where his wife and sons are, and his apartment in Newport Beach.
He said he’d consider moving to OC full time after his youngest son graduates from high school.
“We’ll need a new adventure,” he said.
