Nobody expected much of a second act from Biovail Corp. after CEO Eugene Melnyk exited the company for good in 2007, leaving a trail of disgruntled shareholders and litigants in his wake. But just look at it now.
The Canadian drug company has a new name—Valeant Pharmaceuticals International Inc.—a soaring stock price and one of the best-paid CEOs in Canada, Michael Pearson. From out of nowhere, Pearson has built Valeant into by far the largest publicly traded Canadian-based drug company, sporting a $20-billion (Canadian) market capitalization. Following a flurry of acquisitions, Valeant is on track to top $4.4 billion in revenue this year (currency in U.S. dollars unless otherwise noted). And Pearson is just getting warmed up: Valeant sales will top $10 billion “in the foreseeable future,” he says.
How did Pearson transform one of corporate Canada’s favourite punching bags into a high-flying investor darling? Part of the explanation is that he has erased the Biovail of old. But he has replaced it with a deal-driven, pseudo-Canadian company that has become too big to ignore—and created a whole new set of concerns for investors to contend with.
It’s enough for a company to have one scandalous entrepreneur in its past; Valeant has two. The company, based in Montreal, is the product of the 2010 merger of Biovail and California-based Valeant. If Canadian investors think there’s no topping Melnyk’s foibles, they clearly haven’t met Milan Panic, the man who founded Valeant’s predecessor company.
Panic’s story is extraordinary: Having been a teenage Nazi-resister during the Second World War, he defected from Communist-era Yugoslavia to the West in 1955 while travelling as a member of his native country’s Olympic cycling team. Five years later, he started a pharmaceutical company in his garage in Orange County with all of $200. The company, ICN, grew, along with Panic’s wealth and connections. As his homeland was disintegrating in 1992, Serbian president Slobodan Milosevic invited Panic to become prime minister of Yugoslavia; he accepted. “He is a buccaneer, a two-fisted guy...an American success story,” former California governor Jerry Brown, one of several former politicians on ICN’s board, said of Panic (pronounced pah-nich) in 1992.
The fine print on Panic’s biography is less flattering. Thanks to a falling-out with Milosevic, Panic’s political career was over in just six months. And his business legacy is checkered. ICN discovered a new compound, ribavirin, in the 1970s, that to Panic represented the pharmaceutical holy grail—a billion-dollar, blockbuster drug. Panic claimed it would successfully treat a range of serious illnesses, but the U.S. Food and Drug Administration was unconvinced, approving ribavirin in 1985 only to treat a rare respiratory ailment in children. That didn’t stop Panic from declaring in 1987 that ribavirin could slow the progression of AIDS, a claim that regulators flatly rejected and that resulted in a $600,000 fine (but no admission of guilt). In 1994, the FDA denied approval to market ribavirin as a stand-alone hepatitis C treatment. ICN didn’t pass this news on to shareholders for months—and not until after Panic had sold $1.24 million worth of stock. The company’s poor disclosure netted it a $5.6-million fine. The FDA did finally approve ribavirin to treat hepatitis C in 1998, but only in combination with another drug.
ICN had better luck abroad: Several countries, starting with Mexico in 1975, approved ribavirin to treat a range of ailments, from the flu to herpes. That led the company to expand globally, including the purchase of 75% of Yugoslavia’s largest drug maker in 1991—a deal that tied a significant part of the company’s business to the country just in time for its bloody breakup and the economically damaging sanctions that followed. The subsequent Serbian regime, headed by Panic’s enemy Milosevic, in early 1999 forcefully seized control of ICN’s assets, prompting a drawn-out but ultimately successful lawsuit by Panic.
There were other distractions, including a 1977 settlement with the U.S. Securities and Exchange Commission over allegedly misleading financial forecasts. Most embarrassing, however, was a spate of sexual harassment suits by former female employees against Panic in the 1990s, including one from a former secretary who bore his illegitimate son. ICN’s board painted Panic as an innocent victim of extortion bids and loaned him millions of dollars to settle one of at least four lawsuits. To outsiders, it looked like one more perk from a compliant board—like the luxury pieds-à-terre and corporate jets at the CEO’s disposal.