Maybe working in the pharmaceutical industry is addictive. Ever since he graduated from pharmacy school in 1978, Joseph Papa has hunted progressively harder pharma challenges. He worked at DuPont Pharmaceuticals and Watson Pharmaceuticals. He launched major drugs for Novartis and Pharmacia. He ran the drug division of Cardinal Health. As CEO of Perrigo, a maker of overthe-counter drugs, he went on an acquisitions binge and fought off a takeover by Mylan. After all that, Papa needed more. So in 2016, he decided to make his name as a turnaround artist, and the pharma-ship he jumped aboard was the sinking, flaming barge known as Valeant.
Once a market darling, Valeant had turned toxic. It owed its reputation largely to its former CEO. For eight years, Michael Pearson had charted a reckless course: sinking Valeant deep into debt to acquire drug developers, then jacking up the prices of those drugs so high that he earned the enmity of politicians like U.S. Senator Elizabeth Warren. It worked, until it didn’t. From a high of nearly $270 in 2015, Valeant’s stock had crashed to $35 before Papa was announced as the new CEO (all figures in U.S. dollars). In the two years since, he has had all the challenges he could want. Now, with a corporate rebranding imminent, he’s talking.
When you were CEO of Perrigo, what was your view of Valeant?
They had good products. They had made good acquisitions. I knew Mike Pearson going back to his McKinsey days. He did some very good work trying to move the company forward. Obviously, some things got out of hand.
What led to you taking over?
I was aware Valeant was going to need to sell some products, and I called the chairman and said, “If you’re going to sell products in dermatology or ophthalmology, we’d be interested in acquiring those.” That escalated into the board asking if I would want to come run the company.
Perrigo wasn’t in great shape. (Footnote 1) Did you have any hesitation about leaving when you did?
I’m going to respectfully disagree with that comment. When I joined Perrigo, it was a $15 stock. We brought it to over $200 at its peak. I do think they’ve had some challenges since then. But from when I joined to when I left, we made tremendous progress.
When you arrived at Valeant, what did you see?
There was a burning platform. The turnover rate of our sales force was incredibly high. The public relations view was challenged. We were on the front page of The New York Times about some of the past practices of my predecessor.
So the platform was burning. Which fire did you put out first?
I had to re-recruit my team to the company, making sure the people knew they were an important part of the business. Item number two was “the mission.” We changed our mission within the first 30 days, and it was: to help improve people’s lives with our products.
People needed to believe in what we do as a health-care company.
Michael Pearson had pushed up the stock price by jacking up drug prices. So one of the first things you did when you arrived was to set up an internal committee to look into the pricing of Valeant’s drugs. What effect has that had?
You did your research. One of the narratives I had to change was the idea that Valeant made money only by raising prices.
We set up a committee to prevent any decisions that would be detrimental to the go-forward reputation of our company. No more of these double-digit—or even higher—price increases.
Have those prices come down?
We put together a rebate and up to a 40% discount on some of our cardiovascular products.
We worked very closely with the distribution centres and trade to ensure that, in cases where there was a need, we would bring out a generic version of our products.
And we dramatically improved our patient access program.
Some hospitals complained they hadn’t gotten the discounts they were expecting. Was there a delay?
There was a Bloomberg article that made that comment, and I respectfully disagree with that.
Over 90% of those hospitals had access to that program within a month of when we promised it.
What’s your view of R&D spending? Under Pearson, it was just 3% of sales. Under you, in 2017, it was 4%.
R&D and new products are the reason we exist. In my first year, we dramatically increased our R&D. Admittedly, in the second year it did not go up. As you’re divesting assets, you’re just not going to be spending dollars on R&D. But we expect in 2018 to see a plus-15% increase in our R&D.
There have been a lot of stories about your compensation package, some saying you were paid $63 million (U.S.) in your first year. Can you clarify what you have been paid so far as CEO?
I absolutely acknowledge there were many reports that provided incorrect details of my initial compensation package.
The majority of that package was for what we would call performance-restricted stock where, if I performed X, there was stock Y. However, after the board had a chance to get input from shareholders (Footnote 2), I now receive the same balanced portfolio of incentives annually as all the other senior executives.
The Pearson era was about putting stock price above all. Didn’t the package you agreed to, with payouts for pushing the stock higher, just perpetuate that idea?
Yeah, I can understand how you’re saying that. As I joined, we recruited a new board of directors. They had to think about what they wanted to do in respect to what shareholders wanted, and that’s why we put together a new program. But do I accept that the initial program was similar to a multiyear grant that was done for Mike Pearson? Yes.
Valeant is facing something like a dozen investigations into what was going on before you arrived. How much is that complicating your life?
Christina Ackermann is my general counsel. In 2017, she and her team resolved 80 legal matters, either lawsuits or settlements or business-practice discussions. This year, through the end of April, they had another 20 cases resolved. We had this Allergan litigation. (Footnote 3) Many people expected that to cost us billions of dollars. Christina and her team got that resolved, and it cost us, I believe, $96 million. A more recent example: The state of California had a question for us on the Philidor issue. (Footnote 4) Christina resolved that for $1.8 million, and people had expected that to be billions. There was no admission of wrongdoing on our part.
What about shareholder lawsuits?
Those have not been resolved. But in May, we resolved the Tanner and Davenport litigation. We’ve resolved the Philidor case and were not a party to that. Valeant was a victim of their fraud.
Even so, it’s not a good look when former Valeant executives are being sent to prison.
Our view is that the team today is doing what’s right to ensure these things won’t happen again: changing the board, changing the leadership team, putting in a process for patient access and pricing, making sure we’ve got a new quality system in place.
I accept there are some legacy things to deal with, but we’re making good progress.
You’ve brought Valeant’s debt down substantially. Do you have a number in mind?
When I joined, the debt was over $32 billion. Today, it’s a little more than $25 billion. For a company our size, somewhere around $15 billion to $20 billion is probably a comfortable place to get to. We also want to reduce our overall leverage. Our leverage now is approximately seven times. We want to get that debt-to-EBITDA ratio down to under five.
The day you arrived, Valeant’s stock price was around $35. As of the end of May, it’s around $22. How disappointed are you?
I do not believe our current share price reflects the value of our company. But I understand there are some things I need to continue to improve on, like paying down debt and showing more quarters of growth. This past quarter, we were up organically 2% for the first time since 2015.
Two major pillars of growth for Valeant in the past—acquisitions and jacking up drug prices—are presumably out the window now.
That is true.
So how do you grow?
New products, new products, new products. We feel very good about our investment in R&D, and we’ve identified seven new products that collectively represent less than $100 million of sales that we believe, in five years, could be over $1 billion in sales, collectively, on an annual basis.
Valeant adopts its new name, Bausch Health, in mid-July. What’s your reasoning for that change?
On day one, I felt the company needed a new name. But people who have done this before advised me that you need to make some progress before you just change the name. So I waited. But let’s take apart the current name: Valeant Pharmaceuticals. We’re much more than pharmaceuticals.
We have medical devices, contact lenses, over-the-counter products. Second, the name was damaged. We had to make a change. We felt Bausch Health was perfect, and it comes with part of the Bausch & Lomb legacy, which has been around for 165 years. (Footnote 5)
Things have to change in other ways. While Pearson was pushing Valeant to the brink, I have a sense that the board was closing its eyes. Was that a failure of courage?
I don’t think I can agree with your characterization. I know the people who were on the board before. And importantly, I know the new board, and I would say that we absolutely have a very good board, a very strong board.
Does it feel empowered to stand up for what’s right?
I 100% believe the people on my board today would absolutely ensure that what we’re doing as a company is right.
1. Piper Jaffray analyst David Amsellem said Papa “left the company in shambles.”
2. At Valeant’s AGM in May 2017, just 67% of shareholders voted in favour of Papa’s original pay package. It’s rare for such a vote to fall below 70%.
3. In 2014, Valeant and billionaire investor Bill Ackman, then a member of its board, were accused of insider trading in their joint attempt to buy drug maker Allergan.
4. Philidor was a specialty pharmacy through which Valeant drugs were sold almost exclusively. In May 2018, former Valeant executive Gary Tanner and former Philidor CEO Andrew Davenport were convicted of fraud.
5. Bausch, which Valeant acquired in 2013, started as a purveyor of optical goods. It created Ray-Ban sunglasses in 1937 and the first soft contacts in 1971.
Trevor Cole is the awardwinning author of five books. His latest is The Whisky King, a non-fiction account of Canada’s most infamous mobster bootlegger.