History Valeant Pharmaceuticals International, Inc. Introduction
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Valeant Pharmaceuticals International, Inc. Jason Arnold, Kari Froehlich, Mat McBride, Stanley Parker, Ann Utterback, Robin Chapman, Gail Christian / Arizona State University Introduction significant restructuring efforts before and resulting from the merger, an important question is whether Valeant Pharmaceuticals International, Inc. pro- the changes will yield the benefits promised to motes itself as a multinational specialty pharma- shareholders and enable the firm to compete more ceutical company with a diverse product portfolio effectively. The answers to these questions and oth- focusing on branded pharmaceuticals, branded ers appearing in this case will influence Valeant’s and unbranded generics, and over-the-counter future success. (OTC) products specializing in neurology and der- matology.1 Product sales focus on North America, Central Europe, Mexico, Brazil, and Australia, with History manufacturing sites in Canada, Brazil, Poland, and Valeant Pharmaceuticals was founded in 1960 by 2 Mexico. Milan Panic, a Yugoslavian defector. The com- In his 2006 message to shareholders, Timothy pany started in California and was originally called C. Tyson, then president and chief executive officer, International Chemical & Nuclear Corp. (ICN). reflected, “In many ways, 2006 was a life-changing Panic ran the company for 43 years.5 Initially, the year for Valeant Pharmaceuticals. It was a challeng- company’s primary business involved chemical and ing year—one that certainly stretched us and tested drug sales, but it grew through acquisitions of small our resolve.”3 That was the year that Valeant lost drug companies. In 1963, the company launched its chairman Robert W. O’Leary to cancer. Valeant its IPO.6 would face a new set of challenges in the fall of 2010, In 1970, ICN scientists discovered ribavirin and when it merged with Canada’s Biovail Corporation. in 1985, gained U.S. Food and Drug Administration Although Valeant eventually recovered from the loss (FDA) approval for this drug to treat lung infections of chairman Robert W. O’Leary, would it be able in children. As a blockbuster drug, ribavirin powered to overcome the challenges of the merger and stra- ICN’s growth and reputation for decades.7 In later tegically position itself to capture a significant por- years, Panic directed ICN to promote ribavirin as a tion of the global pharmaceutical market, which was treatment for AIDS and for hepatitis C.8 During the expected to reach $1.1 trillion in 2014?4 1970s, ribavirin failed to qualify for FDA approval Although we give a brief history of Valeant here, as a stand-alone hepatitis C drug. However, in the this case focuses on the merger with Biovail and on 1990s, ribavirin did receive FDA approval to be used Valeant’s neurology division. This division manu- in combination with Schering-Plough’s interferon factures and markets products to treat Parkinson’s drug to treat hepatitis C. The licensing of ribavirin’s disease (PD), epilepsy, migraines, depression, patent to Schering-Plough was lucrative and led to a chronic pain, Huntington’s disease, and myasthenia similar interferon/ribavirin royalty-generating agree- gravis. A central question is whether Valeant will ment with Roche Pharmaceuticals.9 be able to capitalize on a growing demand for its The year 2002 was a watershed one in the his- new epilepsy drug retigabine and its other products tory of ICN. That year, Panic was paid $63.5 mil- as the result of an aging population. Also, due to lion, which included $33 million in bonuses, and The authors thank Professors Robert E. White and Robert E. Hoskisson for their support and under whose direction the case was developed. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The case solely provides material for class discussion. Reprinted by permission. C-1 776812_Valeant.indd6812_Valeant.indd C-1C-1 224/08/114/08/11 66:35:35 PPMM C-2 Valeant Pharmaceuticals International, Inc. other senior executives received bonuses of $15 grow earnings, and focus research and development million.10 A shareholder proxy fight over excessive (R&D) resources on late-stage pipeline drugs. To executive compensation resulted in the replacement accomplish these goals, Valeant reduced headcount19 of Panic, the entire board of directors, and most of and sold its manufacturing facility in Poland, its dis- senior management.11 In the summer of 2006, Panic covery and preclinical assets, and its cancer and HIV reached a settlement with the company to return drug development programs.20 These actions pro- $20 million of his 2002 annual bonus.12 duced cost savings of $30 million during 2006, and In 2003, ICN changed its name to Valeant an estimated $50 million annually thereafter. Pharmaceuticals International and relisted its stock Also in 2006, Valeant obtained FDA permis- symbol on the New York Stock Exchange as VRX. sion to market and launch two drugs in the United The name change signified Valeant’s new strategic States; the cannabinoid drug Cesamet® (used to treat focus and emphasized its core principles and values. nausea and vomiting associated with cancer chemo- This change was made in conjunction with restruc- therapy) and Zelapar® to treat PD. It also acquired turing. Valeant’s restructuring efforts focused on the the hepatitis C drug Infergen® from Intermune. following activities: centralization of global purchas- In the beginning of 2007, Valeant sold its man- ing activities serving to leverage buying power on ufacturing plants in Switzerland and Puerto Rico. a global basis;13 rationalization of Valeant’s manu- Then in late 2007, it sold Infergen® because it had facturing network; and restructuring of debt, result- not met growth and profitability expectations.21 ing in a longer maturity structure and decreasing Also in 2007 Valeant initiated a study of retigabine the effective interest rate.14 These activities allowed for pain associated with postherpetic neuralgia, and Valeant to raise cash for its 2004 and 2005 acqui- a Phase 2b clinical study of taribavirin, for treat- sitions.15 Valeant expanded its specialty neurology ment of chronic hepatitis C.22 platform by acquiring Amarin Pharmaceuticals, In 2008, the company experienced some sig- Inc., Xcel Pharmaceuticals, and Tasmar (a neurol- nificant changes in structure and strategic direction ogy drug).16 as it went through another change in leadership; In 2004, Valeant improved its financial outlook J. Michael Pearson became the new chairman by purchasing and redeeming its 6.5 percent con- and CEO. In March 2008, Valeant announced a vertible subordinated notes.17 However, it experi- company-wide restructuring plan to reduce the enced a financial reversal when the FDA approved company’s focus to two therapeutic classes (der- a generic version of ribavirin. At its peak, ribavirin matology and neurology) and five geographic areas royalties comprised a quarter of all sales; but after (the United States, Canada, Australia/New Zealand, the generic version appeared on the market, they Mexico/Brazil, and Central Europe). The business only accounted for 6 percent of revenues in 2009 infrastructure was adjusted to support this strat- (see Exhibit 1). This revenue stream would diminish egy. Nonstrategic products and regional operations further when generic drug competition entered the that did not meet growth and profitability expec- Japanese and European markets in 2010.18 tations were divested or discontinued. Infergen® In 2006, Valeant announced another strategic rights; Asian assets (including subsidiaries, branch restructuring program intended to reduce costs, offices, and commercial rights in Singapore, the Exhibit 1 Ribavirin Royalty Revenues Revenue Percent of ($ millions) Total Revenue 2009 46.7 6 2008 59.4 9 2007 67.2 10 2006 81.2 9 2005 91.6 11 Source: Valeant 2007 Annual Report and Valeant 2009 Annual Report, www.valeant.com. 776812_Valeant.indd6812_Valeant.indd C-2C-2 224/08/114/08/11 66:35:35 PPMM Valeant Pharmaceuticals International, Inc. C-3 Philippines, Thailand, Indonesia, Vietnam, Taiwan, national Pty Limited (a privately held company Korea, China, Hong Kong, Malaysia, and Macau), in Australia engaged in product development and product rights in Japan; subsidiaries in Argentina sales and marketing of premium skincare products and Uruguay; and business operations located in mostly in Australia), and Laboratoire Dr. Renaud Western and Eastern Europe, the Middle East, and (a privately held cosmeceutical company located in Africa (known as the “WEEMEA” business) were Canada). The year 2009 was also the year that the sold.23 Under Pearson, Valeant’s growth strategy FDA accepted the New Drug Application (NDA) focused on “small buys and diversified drugs, avoid- filing for retigabine.32 As external R&D expenses for ing too much reliance on a single drug.”24 Valeant taribavirin were $2.3 million in 2009 and $8.5 mil- continued its strategy of growth through acquisitions lion in 2008, Valeant chose to stop further indepen- with Coria Laboratories, Ltd. (a privately held U.S. dent development of taribavirin and seek potential specialty pharmaceutical company focused on derma- partners for the program.33 tology products), DermaTech Pty Ltd (an Australian In 2010 Valeant acquired three Brazilian com- specialty pharmaceutical company focused on panies (Instituto Terapeutico Delta Ltda, Bunker dermatology products marketed in Australia), and Industria Farmaceutica Ltda, and a branded gener- Dow Pharmaceutical Sciences, Inc. (a privately