What Papa might preach to Valeant

Analysis

Judging by the stock market reaction Valeant might have found its saviour in Joseph Papa, who the company confirmed yesterday had been poached from Perrigo to become its new chief executive in May.

The truth, however, might be slightly more mundane, revolving as it does around the intricacies of when Valeant might at last file its 2015 annual report. And those banking on a sharp change in strategy should take a look at Mr Papa’s track record at Perrigo, which he had run a bit like a mini-Valeant for much of his 10-year tenure (see table below).

This is not to suggest that Perrigo had made similar use of opaque arrangements with speciality pharmacies – a practice that proved to be the undoing of Valeant and left it at the mercy of creditors (Valeant turns crisis into farce, March 21, 2016).

In vogue

However, in pure business development terms the two companies have led a parallel existence, growing through debt-fuelled acquisitions – a predictable model in the speciality pharma space. The difference was that, unlike Valeant, Perrigo lived within its means by operating this plan on a much smaller scale.

In fact it was not until the $9bn acquisition of the Elan business three years ago that the industry sat up and took notice of Perrigo. This move was a textbook speciality acquisition, using a strong share price to snare an asset that brought with it a highly prized tax-friendly Ireland domicile.

For Perrigo that deal might have been huge, but it was one of nine transactions worth over $100m that Mr Papa had executed.

Perrigo's 10 biggest deals under Joseph Papa
Target company/biz unit Deal Value ($m) Financing structure Business type Deal date
Elan 9,452 Share exchange + cash Pharmaceutical Dec 2013
Omega Pharma 4,739 Share exchange + cash Pharmaceutical Mar 2015
PBM Holdings 808 Cash Other May 2010
Paddock Laboratories 540 Cash Pharmaceutical Jul 2011
Sergeant's Pet Care Products 285 Cash Animal health Oct 2012
Rosemont Pharmaceuticals 283 Cash Pharmaceutical Feb 2013
OTC brands of Glaxosmithkline 223 Cash Consumer health Aug 2015
Naturwohl Pharma 150 Cash Consumer health Sep 2015
Velcera 156 Cash Animal health Apr 2013
Galpharm Healthcare 86 Cash Pharmaceutical Jan 2008

As such, he is unlikely to bring to Valeant a distinctly different business development strategy, though this might not be all that important at a time when the troubled group primarily needs to be steered through a crisis. No doubt Mr Papa’s stewardship of Perrigo through a hostile bid from Mylan counts for a lot.

Valeant stock climbed 7% on Friday on rumours of Mr Papa’s appointment, while Perrigo fell 18% yesterday when this was confirmed, though this had much to do with his leaving just when Perrigo is itself entering choppy waters: it reported a disappointing fourth quarter, leading analysts to cut forecasts on growing competitive pressures.

And there is a prosaic reason for Valeant’s rise, too, and it has to do with releasing its delayed fourth-quarter report. The company has said it aims to file the report with the SEC by April 29, and Mr Papa taking over in May increases confidence in this deadline being met, since he would hardly join the group with such an uncertainty hanging over it.

It seems likely that the 10-K filing, and whatever further nasty details lurk within, will be signed off by Valeant’s outgoing chief, Michael Pearson, enabling a line to be drawn under the sorry events that have led to the group losing 85% of its value in eight months.

Material man

In the same period Perrigo fell 45% as the biopharma market retrenched, having until then enjoyed a more than tenfold share price increase under Mr Papa’s leadership.

The big difference between the companies is the scale of their spending sprees: Valeant is burdened by some $31bn of debt against a market cap of just $12bn, whereas Perrigo’s $5bn of fourth-quarter debt compares with a market valuation of $17bn.

Valeant is facing an SEC subpoena; Mr Pearson, his key investor ally Bill Ackman and former finance chief Howard Schiller are due to testify at a US Senate hearing tomorrow; and it has received notices of default due to the delay of its fourth-quarterly filing in what is starting to look like a scramble for its assets by debt holders.

Valeant investors might well expect great strategic moves from Mr Papa, but right now he probably has more on his plate to worry about than business development.

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