The Story Behind The Craziest Corporate Collapse Of The Last Decade

This is madness.

Things have gone from bad to worse this week at drug giant Valeant Pharmaceuticals, and its future is looking bleak.

After months of scandals and falling stock value, the debt-saddled Canadian company announced Monday that it had fired its CEO and reshuffled some of the seats on its board of directors -- though it still can't get rid of one disgraced former exec who still sits on the board. It also admitted to some shady accounting practices.

The company will re-release basically all of its financial statements, which will almost certainly give a bleaker picture of the company than we already have.

On top of all this, the company is the subject of several investigations, including one by Congress and one by the Securities and Exchange Commission.  

The Valeant story is so complicated and dramatic that one Wells Fargo analyst called it "a soap opera" in The New York Times. That almost seems too conservative a description for this story, so let's dive in. 

'Improper Conduct'

The company appears to have some serious accounting problems. It admitted in a press release on Monday that its former chief financial officer, Howard Schiller, who stepped down as CFO last June, and its corporate comptroller Tanya Carro engaged in “improper conduct.” Essentially, the company recorded some drug sales twice -- once when it sold them to now-shuttered mail-order pharmacy company Philidor, and once when Philidor sold them -- resulting in inflated revenues in 2014 and 2015. (Valeant's relationship with Philidor is very strange, and there's more here if you are interested.) Carro has left the company, but Schiller remains on the board of directors.

This press release comes just three weeks after the company announced it is under investigation by the Securities and Exchange Commission and six weeks after the House of Representatives released a report detailing how Valeant and another drug company, Turing Pharmaceuticals, buy up and inflate the price of drugs. (More on this later.)

Valeant spent a fair amount of energy trying to keep people from finding out about its price gouging, according to the Congressional documents. One internal PR communications plan noted that "Valeant’s upcoming price increase on three drugs ... has the potential to insert Valeant into the ongoing dialogue about orphan drugs, and therefore needs to be managed carefully."

Major Shakeups

As a result of these accounting issues coming to light, the company said Monday that it will replace CEO J. Michael Pearson. The company is looking for a new CEO, and Pearson will remain on board until they find one.

Michael Pearson, the CEO of Valeant, will step down once the company finds a replacement.
Michael Pearson, the CEO of Valeant, will step down once the company finds a replacement.

The company also announced a new addition to its board: William Ackman, the activist investor and CEO of Pershing Square Capital Management, which owns a 9 percent stake in Valeant. Taking a seat on the board personally means Ackman is taking a hands-on approach to righting the Valeant ship in an attempt to make his money back. Last week Ackman's fund lost $1 billion in a single day as a result of its stake. Ackman appears dangerously close to losing the entirety of his original $4.1 billion investment in Valeant, according to Matt Levine at Bloomberg View

Then there’s former CFO Howard Schiller. (Remember him from earlier?) Schiller disagrees with the company's accusation that he engaged in "improper conduct" and released his own statement on Monday saying he did nothing wrong. He is still on the company’s board. The company says it asked him to resign this week, but he refused (a relative rarity in corporate America). So he’s technically not out, but not exactly welcome.

Because the company’s board is capped at 14 people and Schiller refused to resign, another board member, Katharine Stevenson, “voluntarily resigned” in order to make room for Ackman, according to Monday's release.  

Tanking Stock

Until the last few months, Valeant was one of the market's fastest-growing pharmaceutical companies, but its stock has since collapsed. After peaking at more than $260 a share in August of 2015, it is trading at about $34 a share as of Wednesday afternoon. 

Valeant's stock is down more than 80 percent since last August.
Valeant's stock is down more than 80 percent since last August.

Valeant's Special Place In The Industry

Why is this such a big story? Mostly because of Valeant's role in pioneering the financialization of pharmaceuticals. It's not just a company that does research, then turns out prescription drugs. Instead, Valeant is a "platform company," which the Financial Times describes as "companies that expand by continually buying rivals in musty and unloved segments of the market, supposedly squeezing out efficiencies as they go along." 

Recall Martin Shkreli, the executive who made news a few months ago for hiking up the price of the anti-parasitic pill Daraprim, often used by AIDS patients, by more than 5,000 percent? Shkreli didn’t invent that move. Valeant was doing it first. A report published by the House of Representatives in February showed that Valeant bought two “orphan drugs,” a term that describes medications used to treat rare diseases, in 2015 and hiked the prices by 525 percent and 212 percent respectively. Those two drugs alone brought the company $351 million. 

But Valeant also racked up a ton of debt in its quest to buy drugs and smaller pharmaceutical companies -- and it’s increasingly unclear whether that will be sustainable for the company.

Doomsday Predictions

“We do not believe that [Valeant] is really a company with a coherent core in a traditional sense," an analyst from investment bank Piper Jaffray wrote this week, "but rather is just an entity that over the years has sought to take advantage of a series of arbitrage opportunities: tax arbitrage, expense arbitrage and drug pricing arbitrage.”

Bill Gross, the legendary bond trader, tweeted on Tuesday that Valeant’s “biz model was based on leverage and [financial] engineering.”

The company has mostly been run by finance executives over the last decade, as Slate’s Moneybox columnist Jordan Weissmann noted on this week’s Slate Money podcast. Pearson joined Valeant in 2008, after 23 years at the management consulting company McKinsey. Schiller joined as CFO in 2011, after 24 years at Goldman Sachs.

Given the company's epic demise, the financialization of pharmaceuticals is a strategy that doesn’t seem to be working out too well.

Language in this post has been changed to clarify the meaning of "orphan drug."