Wednesday, June 27, 2012

Things Mike Pearson Has Learned

It’s always interesting to hear Mike Pearson, the blunt CEO of Valeant, expound on how nimbly his company is responding to Pharma’s complicated business environment. At an analyst meeting on June 21—coincidentally the last day of BIO 2012 – he took a few minutes for reflection on Valeant’s current strategy, as well as lessons learned from his four years at the helm: Only compete in attractive markets, defined as those in which competition is manageable and overall sales are growing. 

No direct mention of health care reform in the U.S. or market access issues in Europe crossed his lips, but clearly reimbursement and pricing hurdles are behind Valeant’s decision to almost entirely exit Western Europe (a move made prior to the current melt-down), its declining presence in the U.S., which will account for roughly 50% of sales in 2012, down from 65% in 2010, and its de-emphasis of innovative drugs in favor of OTC and branded generics ( 71%, 9% and 20% in 2010 to 59%, 14%, and 27%, respectively, in 2012).  An increasing proportion of Valeant revenues comes from products and geographies that have a heavy out-of-pocket component, even on the innovative side. 

Pearson cited several critical priorities for the company, which relies on a blend of organic and business development activities for growth. If Valeant does not deliver on a 15% return on shareholder value over three years, management takes a hit. With that kind of mandate, Valeant executives can not afford to wait out long R&D cycles.
That approach stands in contrast to Forest Laboratories,which on June 20 also provided investors with an update of its strategy, and which is also somewhat contrarian. Slightly larger than Valeant, although with a significantly lower market cap ($9.2B versus Valeant’s $13B), Forest also avoids risky early stage research in favor of a strong emphasis on business development with a focus on clinical assets.

However, it has an entirely different commercial and portfolio management mindset, with deep roots in primary care: it has no problem building support gradually for drugs that demonstrate incremental improvements over standard of care, continuing to back them despite slow launch trajectories-- an approach that worked brilliantly but now makes analysts jittery, given worries that once-proven tactics won't work in today's vastly constrained markets. 

And while Pearson struck a contrite tone with investors, who have been questioning him lately about lack of visibility on organic growth and ex-U.S. exposure, Forest’s management, led by founder Howard Solomon had a 'hold the fort' message. That message: the company's overhaul of its product development portfolio has succeeded and the current mode of operating is to stay the course.
Of course, Forest has patent cliff issues (80% of revenues at risk by 2015), which Valeant, by eschewing innovative molecule research and early clinical development, strives to avoid. And it is Valeant we’re looking at in this note. In fact, in the four years since he assumed the helm, Pearson said explicitly that he's learned to avoid primary care 'tail' products, such as the anti-depressant Wellbutrin, which did not perform to expectations after it was acquired as part of Valeant's 2010 takeover of Biovail. Also critical is discipline on integration costs. 

That said, company’s returns on its acquisitions has been “phenomenal” Pearson says, and it sees business development opportunities as “quite large” – a contrast to some others in the industry who bemoan the lack of attractive late-stage deals. So the plan is to shift capital deployment from half acquisitions and half share repurchase to more emphasis on the former. And it prefers to buy assets over full companies due to favorable tax treatment, though both are in the cards. In business development, it expects a 20% return, statutory tax rates and a cash payback within six years.

In the past year, Valeant has become a leader in certain sub-segments of dermatology and ophthalmology – and moved into podiatry and dental care, all businesses with a heavy out-of-pocket pay component. Likewise, geographically, its play in Russia is particularly aggressive, as its sales have gone rapidly from less than $40 million to $200 million. Even within that market, though, it is not selling innovative medicines, so much as branded generics and OTC products. In fact, if an asset has government ownership or reimbursement, Valeant walks away.

That sort of flexibility and aggressive rush into non-patent protected franchises implies a willingness to forgo a high-value certainty in favor of operational complexity and the vagaries of economically sensitive products. Its success--Valeant's stock has more than doubled in two years, compared to Forest, which is up only 25% in the same time frame -- is indicative of the climate in which pharma currently operates as it navigates patent cliffs, healthcare reform, and European market access hurdles. It may be an attractive way forward for mid-sized pharma right now but it is a bet on execution and opportunism over innovation and long-term commitment--currently hard-to-reach goals for an industry under siege.



Anonymous said...

I suppose anything is possible when you take total liabilities from $700m at 2009 year end to $9.5B in the latest reported quarter. Junk rated debt.

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