Now that Michael Pearson, the outgoing Valeant Pharmaceuticals chief executive, has issued a mea culpa about his decision to raise drug prices sky high, where does the drug maker go from here?
The prognosis is not healthy — at least as far as some Wall Street wags are concerned.
Two days ago, Valeant hired Joseph Papa, an industry veteran who spent the past decade running Perrigo, which mostly sells over-the-counter and generic medicines, to replace Pearson. But his recent track record is prompting some skepticism amid other concerns about whether he can overcome the many problems that Valeant is facing.
“The company has an exceptionally difficult future ahead of it,” said Wells Fargo analyst David Maris.
Why? Simply put, the drug maker can no longer count on big price hikes to generate growth. Despite intense scrutiny from Congress and payers, Valeant did raise prices on 16 medicines this year, many of which Maris noted already experienced big price increases last year. In fact, the average price of its top 30 products is up 78 percent year-over-year. But going forward, Valeant will have to rely on doctors writing more prescriptions in order to goose sales.
So far, he added, the signs are not good. Three months ago, Valeant shifted distribution of 16 dermatology drugs — a key product franchise — to Walgreens (WBA) from Philidor Rx Services, a mail-order pharmacy that was at the center of Valeant’s recent accounting troubles. The switch means that more Valeant prescriptions can be tracked, and the latest trend suggests a decline, according to Maris.
Meanwhile, Valeant has roughly $30 billion in debt and is locked in negotiations with debtholders, a process that may force the company to sell assets in order to meet its obligations. This is a stark contrast for a company that pursued a years-long acquisition spree. And amid this turmoil, Pearson is leaving, which also suggests that other Valeant managers will follow.
In short, Valeant appears to be anything but a growth story. And this is where Papa steps in.
Before he joined Perrigo in 2006, Papa headed Watson Pharmaceuticals, a large generic drug maker that was later bought by what is now Allergan (AGN). But at Perrigo, he focused largely on businesses that are not in the Valeant wheelhouse — over-the-counter medicines and private-label medicines that are sold by large retailers.
During his tenure, Perrigo captured more than 70 percent of market share in store brands, although this has also been a slow-growth business, according to Maris. This helps explain why Papa began a string of acquisitions and also steered Perrigo into prescriptions drugs. But he stumbled badly last year by convincing shareholders that an unwanted takeover bid from Mylan Laboratories was a bad idea.
In hindsight, his plan has not pleased investors. The Mylan bid valued Perrigo at more than $200 a share and the stock has since dropped more than 50 percent. And two days ago, the company lowered its earnings guidance for the year, citing pressure on its prescription drug unit and a potential write-down for of its $4 billion purchase last year of Omega Pharma, a European over-the-counter drug seller.
“Given the significant problems at Perrigo that Mr. Papa is leaving behind, we would surmise that the appointment was not Valeant’s first choice,” wrote Piper Jaffray analyst David Amsellem in an investor note. “By moving to another company that has even more severe problems than that of Perrigo, in our view, Mr. Papa may be seizing an opportunity that for him most likely has little to no downside.
“We believe it would be premature to read anything into Valeant’s underlying financial and operational health based on Mr. Papa’s appointment,” he continued. “Given what has transpired under Mr. Papa’s watch, it would, in our view, be premature to interpret his appointment as the chief executive of Valeant as a signal of potentially better days ahead for Valeant.”