Pearson had never heard of Valeant before Ingram’s call, but agreed to a consulting contract in mid-2007. A few weeks later, he delivered his findings. “Your current strategy is not only not working, it doesn’t have much of a chance to be successful,” he told directors. “And with that,” recalls Ingram, “he laid out the strategy we now follow.”
Like other smaller pharma companies, Pearson told the board, Valeant was trying to be all things in all regions, stretching itself too thin. It wanted to be like free-spending Big Pharma and develop blockbuster drugs, but had limited resources. Not that the complacent drug giants were great role models: Industry productivity was flatlining as the number of innovative drugs coming to market levelled off. Several blockbuster drugs were approaching the end of their patent protection. Cash-strapped governments were under pressure to curtail rising health-care costs. The industry’s best days appeared to be drawing to a close.
Valeant, Pearson said, should focus only on geographical and therapeutic areas that had good long-term growth prospects, and where it wouldn’t run into intense competition from Big Pharma. Valeant shouldn’t be in Western Europe (low growth) or India or China (too much competition), or any other market where it lacked critical mass, which described the majority of countries where it operated. Despite its past restructuring efforts, Valeant was unwieldy, selling 370 treatments in 2,200 versions via a global supply chain of 85 third-party suppliers.
Pearson saw little potential in Valeant’s cardiovascular, infectious disease and gastrointestinal therapies. Instead, he thought the company’s medicine cabinet should be full of products like its cache of dermatological treatments. It was a corner of the market where Big Pharma was less prevalent, where there was big demand and no one-size-fits-all solution. Best of all, payers were primarily not governments but motivated consumers and private benefits plans. Valeant would have a brighter future selling acne cream and other drugs that matched its profile than trying to cure cancer.
Pearson’s next suggestion was even more daring: Cut research and development spending, the heart of most drug firms, to the bone. “We had a premise that most R&D didn’t give good return to shareholders,” says Pearson. Instead, the company should favour M&A over R&D, buying established treatments that made enough money to matter, but not enough to attract the interest of Big Pharma or generic drug makers. A drug that sold between $10 million and $200 million a year was ideal, and there were a lot of companies working in that range that Valeant could buy, slashing costs with every purchase. As for those promising drugs it had in development, Pearson said, Valeant should strike partnerships with major drug companies that would take them to market, paying Valeant royalties and fees.
The board liked Pearson’s prescription; finding management slow to implement it, the board asked Pearson back for an even bigger assignment: to take a deeper dive into the business. This time he brought a team of McKinseyites, who embedded themselves in the operation around the globe, and recruited board members to take an active role in the extensive review.
The more time they spent with their favourite consultant, the more the directors became convinced he should lead the company. Pearson may not come off as polished as CNBC-friendly CEOs—he can be an awkward speaker—but his strengths were evident to directors. “[His]leadership style wasn’t a cult of personality or a force of will—though he’s extremely willful—but one where the decision making was going to be based on facts, which was a breath of fresh air,” says Morfit. “He felt like a much better fit for what we needed to do.” (The company amicably parted ways with Tyson.)
Pearson started as CEO at Valeant in February, 2008, and quickly put his plan into action. He sold far-flung operations and focused on the company’s business in North America and a handful of overseas markets; slimmed down its portfolio to focus on dermatology and branded generics; and struck an agreement with GlaxoSmithKline to develop and commercialize Valeant’s epilepsy drug, retigabine. The R&D budget dropped 11% to $87 million in 2008, and by another 50% in 2009 (it’s now at less than 5% of sales). That fall, Pearson made the first of many acquisitions.