QUESTION

 

Critically Analyze Valeant Pharmaceuticals International, Inc. Case  and their issues while considering the following questions:

1. What is your assessment of Pearson’s incentive compensation package? Did this incentive compensation package drive Pearson’s acquisition strategy for Valeant?

2. What was the impact of Valeant’s acquisitions on the company’s financial position and performance?

3. Discuss Valeant’s corporate governance practices. Are they consistent with generally accepted best practices?

4. Other than poor earnings, what factors drove Valeant’s stock price down from its peak of US$262.50 on August 5, 2015, to its low of US$26.11 on April 4, 2016, before Papa joined the company on May 2, 2016?

5. What is your assessment of Valeant’s ability to pay down its $30 billion debt?

 

ANSWER

1. Introduction

1. 1. Title

Topic: An analysis, evaluation and deep dive into the various problems that Valeant is facing and proposing solutions as well come up with answers to some very pertinent question deciding the future of the company

1. 2. Abstract

Valeant has been the second biggest brand in Canada by market capitalization right after the Royal Bank of Canada. It has been one of the mainstays in the medical industries of the world with patents in a huge number of medicines on and off the shelf. It has been one of those companies which have increased its market value as well as share prices by way of very aggressive acquisitions and diversification instead of taking out much of the chunk of its money on research and developments. However, its tendency to take loans and increase and acquire companies on the face of it has recently misfired with multiple concerns coming up on its 30 billion dollars debts and the plans that it might have to repay the same. It is also now grappling with the recent lawsuit having claimed its illegal understanding with Philidor and its inability on backing the claims against it on the same. Its continuous loans and debts along with the inability to create enough income to justify for it has resulted in an act getting created that would limit it from making any more acquisitions unless and until it can show enough justifiable income that would make it completely clear that it will be able to take care of the debts thereafter.

1. 1. Background of study

Valeant is involved in multiple industries in the pharmaceutical department which mainly specializes in the dermatological department. Through the strong and aggressive acquisition of companies like Bausch & Lomb and many other companies, it has also gained prowess as well as expertise in the areas starting from the products for health purposes as well as various other ailments that are prevalent nowadays. Through active acquisitions, it has been able to acquire quite a lot of patents and develop their research and development around it. It is a darling of Wall Street and was the 2^nd biggest brand in the market of Canada mainly on the market capitalization.

However recently due to a multitude of problems starting for illicit operations with a mailing company to the delay in filing 10K forms it has received a lot of flacks as well as Senate hearing which has considerably decreased not only its revenues as well as its market recognition but has heavily and negatively affected its stock prices as well resulting it in dipping the same to the lowest point that it has been in the last 5 years of its history. The corporate board and its incentive-based structure have also been one of the pain points of the company with acquisitions fueling the personal motives of the company. The woes of CEO Pearson are also very clearly described in the case given.

1. 4. Research Problems

The heavy allegations against the company targeting as well as criminalizing it for having under the table understanding with a mailing services company like Philidor have resulted in it in getting a huge backlash from not only the public but a strong court hearing from the Senate as well. The confession made by the company agreeing to this crime as well the similar confession as well the agreement by Philidor to completely close its shop has been more of a nail in the coffin resulting in a huge plunge in the stock prices and the market capitalizations of the company. The huge debt structure that has been accrued by the company as part of its strategy of short-term lending and aggressive acquisitions has resulted in huge write-offs as well as complete uncertainty for the repayment of the same. The change and the forgery of the 2014 financial statements also added to the woes of the company thus adding to its already dipping margins and stock prices. Taking all this into account the company is truly looking into a bleak future, and the lack of any more allowance to acquire any undervalued company to ride on its gains as it has previously done has resulted in a complete blockage of any easy means of turnarounds for the company here.

1. 5. Research Questions

Please find the following research questions that would help us to get a grip on the current condition of the company and the level of degradation or any ray of hope that may be available for the same in the future

1. What is your assessment of Pearson’s incentive compensation package? Did this incentive compensation package drive Pearson’s acquisition strategy for Valeant?

2. What was the impact of Valeant’s acquisitions on the company’s financial position and performance?

3. Discuss Valeant’s corporate governance practices. Are they consistent with generally accepted best practices?

4. Other than poor earnings, what factors drove Valeant’s stock price down from its peak of US$262.50 on August 5, 2015, to its low of US$26.11 on April 4, 2016, before Papa joined the company on May 2, 2016?

5. What is your assessment of Valeant’s ability to pay down its $30 billion debt?

The above questions range from the incentive packages that are prevalent in the organization to the impact of the corporate governance policies that the company boasts of . This will help us to have a sweeping look into working as well as the present scenario in the company.

1. 6. Structure of the work

The first chapter of the study discusses the abstract as well as the market scenario during the research. It also provides a background of the study. The research questions and research problems that are discussed are provided in this section.

The second chapter of the study consists of the literature review section that involves studying and evaluating different studies and articles relevant to the study. The status of the Valeant in pharmaceutical industry across Canada as well as the situation of the industry as a whole across the globe and the strategies which led to the decline in its business over a time period.

The third chapter is the results and discussion section which consists of an analysis of the data collected company review and industry policies. The data collected is interpreted on the basis of the subject, and a discussion for the same is provided.It also takes into account some other strategic processes that can be used in order to understand the innate strength as well as the weakness of the company in the present scenario

The fourth chapter of the study takes all the above points into account and tries to get a grip as well as a solution if not a suggestion to the various research questions that have been proposed as a part of the study given

The fifth chapter is the conclusion and recommendations section where the strategies and plans derived at the end of the discussion carried out in the above chapter are provided. The steps that Valeant Company should take for recovering its business in the current year are suggested with the help of the studies, theories and data analyzed. Recommendations for improving the performance of the Valeant Company after the downfall in its business in a period that has been mainly targeted in the study (2011 – 2016) is provided in this section.

1. Literature Review

2.1 Literature review on the industry

With a global worth of around 970 billion dollars and planned to cross the 1000-billion-dollar mark before the end of this decade pharmaceutical industry is one of the biggest and an industry which is completely immunized against any sort of downfall as well as any recession. It is also one of the most competed industry with a huge number of companies jostling among themselves in order to gain the upper hand in the industry. The prevalence of patented technologies, as well as medicines, results in a huge pressure in the companies thus fighting for dominance to continuously keep their research and developments in track in order to assure the fact that they are not forgotten in oblivion

Industry size

The pharmaceutical industry is one of the highest sizes in the world and contributes heavily to the GDP of the world. It is one of the biggest private dominate industry of the world bringing in an annual turnover amounting to hundreds of billions

Number of people affected by World Pharmaceutical Industry	7 Billion
Total Value of Pharmaceutical Industry in 2017	$934.8 billion
People employed in the World pharmaceutical Industry (in 2017)	4.4 million
Number of Pharmaceutical Companies in the World	>400
Total number of Pharmacies in the US	67000
Expenditure on Health as part of GDP in the US	17.1% of the total GDP

(https://www.ifpma.org/wp-content/uploads/2016/02/wifor_key_findings_2015_web.pdf)

https://www.ifpma.org/wp-content/uploads/2017/02/IFPMA-Facts-And-Figures-2017.pdf

Market analysis

Porter’s five forces model is used for carrying the market analysis of the retail industry in the UK, and it involves the following factors:

The threat of new entrants

There is a huge capital investment required for entering the pharmaceutical industry followed by a huge amount of money that needs to be used on the research and development. Hence, the threat of new entrants entering the retail industry is low. However, there are many companies that are coming up in the generic medicine division which effectively creates cheaper medicines from the ones created by the bigger companies once those medicines have expired their patents and sell them at a cheaper rate. This eradicated the need to create any sort of research facilities this heavily reducing the exit barrier. This has resulted in strong law and legislatures to control the same, but the problem is still heavily prevalent

The threat of substitute products

The pharmaceutical industry is one of very high competition level with multiple companies vying for patents to make the chemical composition of their drug unique. However, once the patent of any drug wears off, it is generally heavily duplicated and made into a generic drug by the generic medical industry.

Bargaining power of suppliers

The bargaining power of suppliers is not high in this industry owing to the fact that many of the companies in the pharmaceutical industry have vertically integrated their structures to rid themselves of any sort of supplier dependence completely. This not only leads to a better supply chain for the companies but also helps them to reduce costs and thus increase their profit margins drastically

Bargaining power of buyers

The bargaining power mainly those of the doctors who prescribe the medicine to the end consumer is very high as there are a huge number of options and similar medicines from various companies that one can choose from. This generally leads the companies to create heavy promotional and gift packages for the doctors in order to make sure that they refer and thus improve the sales of the medicine that their company is selling

Rivalry among existing competitors

As discussed in the above phase there is a high level of competition between the various companies as there are multiple companies producing and distributing various variants of the same drug. This leads to a huge war for patents and getting exclusivity for their medicine. However, once the patent wears of the generic market generally take over and creates similar medicines at much lower cost and thus more easily available to the end consumer. It is one of the hardest battles of the companies to keep their product afloat once the patent has expired

2.2 Situation analysis of the company

Situational Analysis is carried out with PESTEL Analysis model developed for Valeant Group. It is discussed as follows:

Political

With a huge political campaign not only banning and keeping a very close watch on the pricing policies of the companies as is very clearly shown in this case, but laws and regulation actually promoting and, in some places, suggesting the generic market has been detrimental to the pharmaceutical companies as a whole. This political hostility has led many companies like the one described here to leave their R&D facilities and mainly bank on the acquisition and quick inventions (Keisha Frue,2018).

Economic

Though the fields of medicine and hospitals remain one of the few industries that are not affected by recession still a shortage of money and the effects thereafter saw much lesser spending on healthcare. This is compounded by the events of price politics and forgery that are told about in this case. This and the multiple medicines that are present in the market nowadays has resulted in a heavy price sensitive class and thus a very controlled economic scenario (Keisha Frue,2018)

Social

With the world has become increasingly social now it has become imperative for the companies to be very careful about what they promote and how they satisfy their customers as even a slight misstep can result in a full-blown social campaign in the social network that can heavily impact the image as well as the future sales of the company. Thus the companies have become very socially active, and though the medical companies do not really promote themselves directly they are always available on their social handles and in facebook to answer any sort of question and keep the social network wave in their favor (Keisha Frue,2018)

Legal

A strong legal framework keeping a very close track on the happenings and proceeding in the medical industry has resulted in a sultry and cautious atmosphere in the pharmaceutical industry. With the government cracking down with full force on even the slightest allegation of predatory and overpricing like mentioned in the case it has become imperatory for the companies to maintain a transparent outlook and process chain in order to evade the gnawing claws of the law (Keisha Frue,2018)

Technological

With the advent of many technological marvels as well as marketing based on the requirement and data gathered from the consumers, it has become very important now to keep up with the changing trends. The companies as Valeant who also dabble in the medical accessories market the technological changes and the strive to keep up with it becomes all the more important to stay relevant in the market (Keisha Frue,2018).

Financial ratio analysis:

The proposed plan of the analysis involves considering the financial ratios obtained from the financial statements of Valeant Group. The financial statements are derived from its annual report. The financial ratios which are discussed in the study are provided below:

1. Profitability Ratio

1. • Return over Equity (ROE):

   • Return over Assets (ROA):

2. Liquidity Ratio

1. • Current ratio

3. Debt to Equity ratio

Profitability Ratio:

Return over Equity (ROE):

ROE =

= (Valeant Pharmaceutical,2015)

= -0.047

Return over Assets (ROA):

ROA =

= (Valeant Pharmaceutical,2015)

= -0.005

Liquidity Ratio:

Current ratio =

= (Valeant Pharmaceutical,2015)

= 1.034

Debt to Equity ratio:

=

= (Valeant Pharmaceutical,2015)

= 5.908

The financial analysis clearly shows the present state of the company does pose a bit of a problem primarily for the reason that the total debt that the company has far exceeds that of its total equity thus making it very close to bankruptcy

3. Results and Discussion

4.1 Strategic analysis using appropriate models

There are many models and tools adopted for strategic analysis of the business performance of Valeant Pharmaceuticals in the time period between 2011 and 2016. Strategic Analysis involves deriving factors that affect the business performance of the company on the basis of SWOT Analysis, balanced scorecard analysis, Financial analysis, situational analysis through PESTEL and many other to get a thorough understanding of the present scenario of the company. A SWOT Analysis for the Valeant Pharmaceutical is shown as follows:

Marketing Analysis through SWOT Analysis model

Strengths:	Weaknesses
Strong Focus on R & D capabilities, Heavy acquisitions resulting in taking up of multiple big shot companies like the Bausch & Lomb It has a global appeal and also one of the darlings of Wall Street with a huge backing in its home country of Canada, It operates in multiple locations in Canada and the US and is the second largest brand by market capitalization in Canada (Valeant Pharmaceuticals,2017) The pharmaceutical business is highly stable across the globe, It invests significantly in building relationships with customers and providing them a high-quality product, Pharmaceutical business and its subsidiaries have contributed effectively in its success contributing to about majority of its revenues, The continuous recognition and acquisition of undervalued brands and companies have helped it to be continuously at the forefront with limited R&D (Valeant Pharmaceuticals,2017)	The presence of a generic market and the loss of its patents has not helped it in its journeys The pharmaceutical industry is slowly plateauing showing a much slower growth rate than that of the last decades Loss of key acquisitions and the products (Botox) attached to it has not helped in its future plans, Inability to defend itself from the allegation of using a mailing company in the wrong light has hurt its images among the consumers The huge debts and the consequent law passed stopping it from being able to acquire any more company has resulted in its stunted growth and thus creates a huge question sign on its future.
Opportunities	Threats
The pharmaceutical business is a recession proof business with new avenues and healthcare opening up every day keeping it constantly in the growing phase The huge diversified portfolio that the company boasts has helped it to keep a strong presence throughout the market. This portfolio can be enhanced and thus improved upon It has 6 million online customers and affects millions more indirectly through their life support and accessory products,	It suffered its biggest ever loss since the last decade in 2015-2016. There was a loss in the net income of the company showing not so good times for the same The blockade on its buying and acquisition spree and made it lose the strongest item in its arsenal leaving it to fend with the present resources to get back on its feet A huge debt surmounting 30 billion dollars and not enough equity as well as future planning to show a road map to actually and sufficiently tackle the same has made the future look very bleak for the company

Balance Scorecard Analysis

A balance scorecard Analysis for the Valeant Group is derived on the basis of four factors, and they are discussed as follows (Rui Janota , 2012)

1. Customer Perspective:

The company at the present scenario is facing a huge backlash from the customer due to its recent confession to using Philidor for unethical means and also of increasing the cost of two of its medicine to beyond normal standards. Though this right now truly is a point of utmost importance if the company is able to play its card correctly it will be able to tide off this issues as at the end it is a well-known brand of a very important industry

2. Financial Perspective:

The financial perspective of the company is not of much encouragement as the blockade of all acquisition by the Senate has resulted in it in debt above 30 billion dollars with dwindling revenues. The only way it can get back up to its normal proceedings is by trimming off many of its industries and if needed sell off some of its subsidiaries

3. Internal Process Perspective:

With much heavier importance given to the acquisition that on resources the internal process is heavily outward facing resulting in only assimilating ready made industries and companies rather than building up a sustainable internal process on its own

4. Learning/ Growth Perspective:

Though the company hasn’t recently been in the forefront of any sort of huge employee upheaval or attrition however the recent proceedings and the new updates of the sorry state that the company is in may result in a huge exodus from the same.

Fig 1

4. Solutions for the research problems

The research problems that we are pitted against in this cases stems from the satisfaction to the various policies that are applied in the company leading us to use all the knowledge that we have gained in the above processes to come up with the solutions.

As part of the first question that we are faced the incentive package that Pearson as the CEO and many other top executives in the company were receiving were thoroughly depended on a set percent of growth in the company in a given set of years, prior to which the shares that were disbursed to the said individuals were not allowed to be sold or transferred. Though such type of incentive-based in performance system is a really good way to make sure that the executives of the company always stay on their toes and are always solely focussed on the improvement of the company it may also in some cases give rise to personal greed. Though it is not possible to prove this based on the excerpts that we have read in the case but it may be possible that this very incentive package propelled Pearson to go for a much more bolder acquisition steps which would give you spurts of growth instead of truly delving into the innards of the company and create a strong R&D facility for sustained growth. However though in this case, the technique of acquisition had worked wonders for the company in the early phases failures to acquire important companies and their products and also the debt that ballooned due to it soon took the company to its downfall

In continuation of that if we see the outcomes of various acquisitions that Valeant made in the various industries of pharmaceutical it is very easily evident it had an ambivalent effect. Though the acquisition of very famous and well to do companies like Bausch and Lomb did help the company to diversify its business heavily and also gain a lot in intangible assets like goodwill across the years the debt that the company used to fuel it soon ballooned to more than 30 billion which resulted in higher debt than equity . This also let to a negative net revenue at the end of 2015 and a very low price per share. All this in combination to the recent proceedings against the company barring it from being able to acquire any new company not only resulted in a huge amount of debt that was almost impossible to repay but also low feedback and market value. Thus the impact of the various acquisition that was done as part of Pearson’s reign though looked really good in the short run when they automatically brought in their R&D s and goodwill in the long run ended up being detrimental for the company.

The corporate governance policy that the company followed was well within the standard guidelines. With the charter for the board, the board committees it made sure that a set state of rules and regulation were followed. It had a board of 11 independent directors who would meet as and when required and also on scheduled times in order to make sure that the operations of the company are going on in a smooth manner. This board of directors was liable to run any number of terms that they want and the number of people in the boards would generally fluctuate. There were 5 committees taking care and decision on every issue ranging from the human development to the financial transaction to a new committee of compliance being formed in order to enforce rules and regulation after the Philidor incident. However, having said all these even the members of these boards were paid based in incentives and shares thus on their performances which as has been described in details above is not really the best way to make sure that the most effective and best decisions are taken

There were multiple reasons for which the stock prices of the company dropped to an all-time low just before the time that Papa John joined the company. The reason extended from a heavy action lawsuit going against the company which directly accused it of misusing the trust of the people by using a mailing service in the wrong way and also extended to the truly sorry state the company was in due to the ballooning debt that it had almost no other way to pay ack unless and until it decided to sell off some of its subsidiary company. Though the earlier surge of its stock prices based on the successful acquisition of multiple big shot company with strong product line did result in a huge and well-grown market for the company but losses and inability to acquire some important companies therein, the negative factors mentioned above and tagged along with the bar put through by the government to stop it from expanding itself any further resulted in heavy negative publicity and thus dipped the prices to an all-time low.

As per the assessments that we see in the various financial statements that are given in the case wherein it is very obvious that across the years the ROE and the ROA for the company have both decreased mainly fuelled by a very low income in the year of 2015. Though the goodwill of the company still stays high due to the added effect of multiple companies that it has acquired but the huge debt payable has resulted in a debt to equity ratio of almost 6 which is almost the double to the previous year. This compounded with a decreasing ratio of COGS to Sales makes us completely understand that the company is slowly even losing its operational efficiency. And the recent act passed by the government barring any more acquisition of the company almost clearly shows that the situation might not improve given the company does not have any strong R&D facility. Taking all these into account it might be nigh impossible for the company to pay back the 30-billion-dollar debt unless and until it decides to sell off some of its strong subsidiaries. Whatever be the decision the future doesn’t look good for the company (Gandel,Steven (2015))

5. Conclusion and Recommendations

5.1 Conclusion

By reading the case and making use of the data that is present across the industry, it is almost sure that this here is an example of a behemoth taking wrong steps and falling flat on its feet. It now relies solely on the prowess of its new CEO who has rightly completely focussed his attention to removing the debt to get the company back to its feet if possible. However, the amount of sacrifice that is required and what permanent effect it will throw in the company is for the future to see (Mclean Bethany. (2016).)

5.2 Recommendations

As described above the prime concern that the CEO should follow now is to reduce the debt so that the company returns back from the oblivion in the consumer’s eyes. This may be followed by stock issuance and huge investment in R&D as it is amply proven that the present procedure of the company to acquire and progress is not feasible in the long term. (Demetris, Afxentiou (2017))

References

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Gandel,Steven (2015). ‘The Valiant :A Timeline of Big Pharma Scandal’ Retrieved from http://fortune.com/2015/10/31/valeant-scandal/

Bosanac, Alexandra (2016). ‘Why the trouble at Valeant start from Board of Directors’ Retrieved from https://www.canadianbusiness.com/companies-and-industries/why-the-trouble-at-valeant-starts-with-its-board-of-directors/

Financial Post (2016). ‘Valeant a new business model and now a new name’ Retrieved from https://business.financialpost.com/pmn/business-pmn/valeant-a-new-business-model-and-now-a-new-name

Suroweichi, James (2016). ‘Why MoneyBall failed in the Pharma Industry’ Retrieved from https://www.newyorker.com/business/currency/valeant-why-moneyball-failed-in-the-pharmaceutical-industry

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BlakenHorn Dana (2018). ‘Valeant’s Debt wont be fooled by a Name Change’ Retrieved from https://investorplace.com/2018/05/valeant-pharmatceuticals-debt-wont-fooled-name-change/

Margaret Armie (2017). ‘Valeant’s continues quest to repay massive 30 billion debt loan’ Retrieved from https://www.thestreet.com/story/14219212/1/valeant-shares-spike-after-drug-maker-cuts-debt-by-811m.html

Janota Rui (2012). ‘Balanced Scorecard in Pharmaceutical Industry’ Retrieved from https://repositorio.iscte-iul.pt/bitstream/10071/13969/1/The%20Balanced%20Scorecard%20in%20a%20Pharmaceutical%20Company.pdf

Keisha Frue (2018). ‘PEST analysis of Healthcare industry’ Retrieved from https://pestleanalysis.com/pest-analysis-of-healthcare-industry/

Kauflin Jeff (2017). ‘The Worst CEO Screw ups of 2016’ Retrieved from https://www.forbes.com/sites/jeffkauflin/2016/12/20/the-worst-ceo-screw-ups-of-2016/

Demetris, Afxentiou (2017). ‘Valiant Pharmaceutical:Is Recovery possible?’ Retrieved from https://www.fool.ca/2017/04/19/valeant-pharmaceuticals-intl-inc-is-a-recovery-possible/

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