Valeant CEO showcases savvy dealmaking style

TORONTO Thu Mar 31, 2011 7:25pm EDT

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TORONTO (Reuters) - All it took was three years and 20 deals for Michael Pearson to aim at a $5.7 billion jackpot, and prove a formula devised in his days as a management consultant.

Pearson is leading the bid by Valeant Pharmaceuticals (VRX.TO) (VRX.N) to take over U.S. drugmaker Cephalon CEPH.O, his biggest bet so far on a theory that the traditional growth model -- through heavy research and development spending -- in the industry is broken.

The surest road to growth, he says, is through acquisitions.

"I like doing deals. I like working with people. I like to get out and help in the operation side of things," said Pearson, whose first job was as a newspaper delivery boy in highschool, but who found his true love in dealmaking.

That's the same advice he gave Valeant when it hired him in 2008 to turn the company around.

At the time, he was working for McKinsey & Co, the global management consulting firm specializing in executive-level reform in corporations.

Among his key suggestions were to radically restructure and to cut research and development spending in favor of acquiring other drugmakers, not a common path by pharma players.

"You recommend it, see if you can do it," the board told him as they took him on as chairman and chief executive.

Today, Pearson's story is one of a unique dealmaking style that transformed Valeant through bold moves like the $3.3 billion deal last year that saw him take the reins of Canadian pharmaceutical giant Biovail and give it the Valeant name.

Since that deal closed in September, Valeant's stock has jumped 75 percent. In the two years before that, since he took the Valeant helm in 2008, the once-languishing stock price has almost doubled.

Pearson's M&A style, including the unsolicited bid for Cephalon, financed totally through debt, is drawing attention.

His formula of cutting R&D costs, perpetually shopping for cheap targets, setting out aggressive timeframes, closing deals quickly and always spending cash instead of equity, sets him apart in the pharmaceutical world.

BUCKING TRADITION

Pearson says heavy R&D spending favors only bigger firms.

"The way that strategy works is you have to assume you're smarter than everyone else or you're luckier. We clearly aren't smarter. And I'm not a fan of a strategy that involves luck," he told Reuters in an interview this week.

"If you look in aggregate, the amount spent on R&D on average has not had a positive return," he said of the view he arrived at while at McKinsey and which he posited to the board at the time. "It was through reflections on what I'd seen work or not work."

Other pharma firms have paid attention to his moves, which come at a time the sector is changing. Companies like Pfizer (PFE.N) have been clamping down on R&D spending.

Born in the central Canadian province of Ontario, Pearson went on to study management at the University of Virginia before joining McKinsey -- where he worked for 23 years.

Valeant as it is today came into being not even a year ago, when it was acquired by Canadian biotech giant Biovail, the maker of drugs like Wellbutrin, a treatment for depression.

The complex deal saw Biovail take Valeant's name and adopt Pearson as its new CEO, who pledged to focus on M&A.

The executive, who has lived in countries from Italy to Japan, says that what drives him is share price.

"The stock price -- that's the metric, right? Over time, our job is to keep that going up," he says.

The philosophy has helped Valeant win investor support that was sorely lacking under its former incarnation as Biovail.

The Valeant of today is several steps removed from the Biovail of the past, prone to management disputes over strategy that were bad enough to persuade many not to invest. The former firm also had issues with financial bookkeeping.

Some no longer even see Valeant as a Canadian company.

"It's somewhat a Canadian firm, but investors don't care at the end of the day," a biotech investment banker said on condition of anonymity. "Investors care that the stock is up."

The stock rose 12 percent on Wednesday, the first day of trading after the takeover bid for Cephalon was made public.

It took the Biovail deal to bring Pearson back to his home province of Ontario, where his family still owns a cottage in the Muskoka Lakes district. "So if I have a home, that's my home," he says.

(Reporting by S. John Tilak in Toronto, Lewis Krauskopf in New York)

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