Biovail was in his sights early on. It was about the same size as Valeant (2009 revenues of $820 million to Valeant’s $830 million), and had a bloated cost structure and a big R&D budget. But it had something else as well: It wasn’t based in the United States.
In fact, merging with a non-American drug company—or more precisely, engineering a reverse takeover whereby Valeant would be folded into the foreign entity but retain Pearson and his plan—“was certainly a key part of the strategy,” says Ingram. Freed from the limits of the U.S. taxation regime, a foreign-based Valeant would be able to take advantage of the more flexible and tax-lowering rules in a country like Canada that allowed companies to move their intellectual property and profit centres to low-tax jurisdictions and then repatriate their profits without further taxation. Biovail had practically made an art form out of this practice, using a Barbados-domiciled subsidiary to cut its taxes.
The merger fell apart twice over Biovail’s objections to Valeant’s terms, but finally came together in June, 2010, with Pearson as CEO and Wells as non-executive chairman. Under a carefully constructed deal, Biovail shareholders got 50.5% of the combined company, while Valeant shareholders got 49.5% and a $16.77-per-share dividend, making the Canadian company the acquirer. But the company took on Valeant’s name, indicating which partner really drove the deal. Wells and other Biovail executives were gone less than three months after the merger closed in September, 2010. The company uprooted the headquarters from Mississauga to Montreal (thanks to Quebec government incentives), but the brain trust largely works out of New Jersey offices near Pearson’s home.
It’s hard to see what else attracted Pearson to Biovail besides its tax structure. Biovail’s key products—neurological treatments including Wellbutrin XL—faced generic competition and declining sales. Last June, Pearson told investors and analysts the merger “led to a mix of revenue that we did not particularly like.” Even before the merger, “we felt [Biovail] was not making wise investments in research, that its products were not performing nearly as well as people had hoped,” Ingram says. As Valeant has continued to bulk up, its overall share of revenues from its less profitable neurological treatments inherited from Biovail has shrivelled—but its overall cash tax rate has collapsed, to less than 5%. “If it wasn’t for this tax structure, it’s doubtful that Biovail shareholders would have been rescued by Valeant from a future of steadily declining legacy profits,” forensic accounting firm Veritas Investment Research said in a note shortly after the deal closed.
Pearson spends the vast majority of his time on the road (he’s entitled in some cases to fly his family on the corporate jet). So, on a typical day in November, he’s in Denver, telling investors about his latest acquisition, dermatology specialist Medicis Pharmaceutical Corp. Earlier this week, he was in Scottsdale, Arizona, where Medicis is based, putting the finishing touches on the $2.6-billion purchase, but also scoping out another target, one of between 25 and 50 potential deals he’s eyeing. Asked how many acquisitions he’s done since joining Valeant in 2008, Pearson gruffly replies, “I don’t know, 50, 60, 70, somewhere in that range.” (The official number is 57.)
Pearson takes pride in getting deals done fast. Due diligence happens “very quickly”—Medicis took just 10 days—and he doesn’t use investment bankers (but then again, CFO Howard Schiller formerly ran investment banking at Goldman Sachs). Valeant, Pearson says, pays “low prices” and targets a 20% return on investments. Pearson is against selling stock to finance deals, so he has been tapping eager credit markets instead: Following the Medicis deal, Valeant’s debt is a staggering $11 billion—up more than threefold from two years ago, amounting to a highly levered 4.2 times earnings before interest, taxes, depreciation and amortization (EBITDA).
Pearson’s strategy means that Valeant is in a state of perpetual change: All that dealmaking is necessarily attended by constant restructuring and shifts in focus. (Online industry bulletin boards are full of anonymous, vitriolic comments about Pearson and the company’s ruthless rationalization of sales and research jobs.) After initially zeroing in on dermatology and generics and the North American market, Valeant has since bought into oral care, podiatry and vision treatment, but its offerings also include sports nutrition products, supplements and cosmetics. The company sells treatments for gum disease and athlete’s foot, as well as over-the-counter Cold-FX. It has expanded into Southeast Asia and South Africa, and has also continued to sell the rights to commercialize drugs in its pipeline. The Medicis deal brings the focus back to dermatology: Medicis’s biggest sellers include acne medicines and wrinkle-reducing injections.