Valeant (VRX) fell as much as 6% intra-day before rebounding after its conference call this morning failed to quell investor concerns surrounding the company. CEO Michael Pearson has dominated headlines in recent weeks, after his company’s stock fell over 60% since hitting highs in August. The drop followed accusations in October from short-seller Citron Research that alleged Valeant used specialty pharmacy Philidor Rx Services to inflate sales.
Pearson, who presided over Valeant during a 2,500% rise from $10 per share in February 2008 to its high this summer of $263.81, had been admired by many on Wall Street as the man who rewrote the rules of big pharma, prioritizing cost cutting and boosting sales over investing in research and development.
While Citron's accounting allegations marked a capitulation point for many investors, Valeant’s core business model—to acquire companies with existing drugs, cut research and development and focus on sales -- had been under attack for years because it was seen as threatening the traditional pharmaceutical business model. And this tension came to a head during Valeant’s failed attempt to acquire botox maker Allergan (AGN) last year.
Allergan's resistance to the deal reflected widely held skepticism of Valeant’s strategy. In a presentation to analysts, former Allergan CEO David Pyott criticized Valeant’s reliance on cost-cutting: “We question how Valeant could maintain Allergan’s sales growth, especially considering the significant cost reductions Valeant is proposing.”
Comparable cost cutting at J&J
But what has been overlooked is that Pearson was involved in another controversial cost-cutting episode -- this one a decade ago at Johnson & Johnson (JNJ) -- that also got the company in trouble.
It is widely known that 56-year-old Pearson joined Valeant after 23 years with consulting firm McKinsey, where he ran its global pharmaceutical practice. But what isn’t known is that one of his important clients during that time was former J&J CEO Bill Weldon, according to multiple former J&J executives, who asked that their identity not be revealed because they continue to work in the pharma industry. McKinsey would not confirm the identities of clients.
J&J, one of the most trusted brands in the country —Johnson's baby shampoo, Tylenol, and Band-Aids have become iconic staples—suffered a blow under Weldon’s tenure when McNeil Consumer Healthcare, the division that makes the company’s over-the-counter (OTC) drugs, announced a series of recalls starting in 2009.
In an in-depth expose, Fortune reported that the cause for many of these recalls was cost cutting in quality control, to some degree stemming from department consolidation following J&J's 2006 acquisition of Pfizer’s (PFE) consumer health division. While at McKinsey, Pearson was charged with leading the integration of J&J’s $16.6 billion acquisition of Pfizer, according to the former J&J executives.
With the deal, J&J added Listerine, Sudafed, Lubriderm, and Benadryl to its portfolio, and gained the rights to launch Zyrtec -- previously a prescription allergy drug -- over the counter. But importantly, cost cutting was the priority, according to the former J&J executives.
And the ties to J&J's playbook extend beyond Pearson’s involvement.
Valeant board member Colleen Goggins, now on the committee Pearson created to run the investigation into the Valeant's relationship with Philidor, was head of J&J’s consumer group from 2001 to 2011, when she left following the troubling series of recalls. According to the former J&J executives, Goggins was forced out of J&J as a result of the recalls and, as one of them said, "blindly executing the Pearson McKinsey plan."
Goggins testified at Congressional hearings that investigated Johnson & Johnson's recall of children's Tylenol and other drugs in May 2010 and September 2010 before leaving the company in March 2011, the same time the Food & Drug Administration came to a settlement with McNeil. When asked about Goggins' involvement in the company's series of recalls, a spokesperson for Johnson & Johnson said that the Department of Justice's investigation was "resolved and no individuals were ever charged or found guilty of any wrongdoing."
“She and Weldon had disregard for compliance and quality in the drive to deliver the cuts and growth assumed in the deal,” said one of the former J&J executives.
Valeant declined to comment for this story.
