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Valeant: The End of the Michael Pearson Era

Valeant Pharmaceuticals International, the corporate poster child for price-gouging, tax-inversion and hedge-fund manager wealth destruction quietly severed all ties with J. Michael Pearson, its former chief executive officer and longtime guiding light, in January, according to its annual proxy statement filed this morning.

While Pearson stepped down from Valeant in May 2016, and struck a wide-ranging separation agreement that paid him $83,333 per month for consulting — especially the much-touted and at least temporarily disastrous Walgreens contract — his primary job was to cooperate with the seemingly eternally expanding roster of civil and criminal investigations.

The deal with Pearson was supposed to last through this December and the use of the word “initial” in the contract’s wording was a suggestion it might be renewed. Valeant, in the proxy, says it last paid him in October, and in December its board of directors determined no more payments would be made: “In December 2016, the Board determined that we are not in a position to make any further payments to Mr. Pearson, including in connection with his then-outstanding equity awards with respect to 3,053,014 shares.”

Pearson’s agreement was terminated in January for unspecified reasons.

Assuming that Valeant’s language is not implying that the company simply doesn’t have the cash available to pay Pearson, then a legitimate question becomes whether he did anything to violate the terms of his agreement through noncooperation. Given that it paid him $1 million annually with full benefits, allowing him to have an office, an assistant and legal fees paid for, this does not seem to be in his best interests.

Also of note is the timing of the cessation of payments to Pearson in October given that charges against Philidor Rx Services were filed on Nov. 17. While it is highly unlikely that Valeant’s board would have a sense of when — or even if — additional charges might be brought, their own counsel was assuredly aware that federal prosecutors have a long-standing practice of refusing to negotiate settlements with companies where they are actively pursuing indictments against current leadership.

(Southern Investigative Reporting Foundation readers will recall its investigative work from October 2015 that began an ongoing reexamination of the company’s ethics and business practices that has forced its share price to $10.86 in recent trading, down from over $257 in July 2015.)

A call to Scott Hirsch, Valeant’s communications chief, seeking comment was not returned.

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Mr. Schiller’s $9 Million Worth of Reasons to Work Cheaply

Valeant Pharmaceuticals is the type of company that tends to make even the simplest things complex.

The contract of Howard Schiller, its new chief executive officer, is proof of this tendency.

On Jan. 6 Valeant’s board of directors gave Schiller the role of interim CEO; the company previously had an hoc, three-man “office of the chief executive”created on Dec. 28 in the wake of the disclosure that founder and then CEO J. Michael Pearson had taken a medical leave of absence of indefinite duration.

Notwithstanding the fact that Valeant has become the most closely followed company in the capital markets — attributable in part to the Southern Investigative Reporting Foundation’s revelations of its hidden ownership of Philidor — it was reasonable to have expected a filing several days after Schiller’s appointment that disclosed relevant compensation package details.

But that announcement came only on Feb. 1, three weeks after Schiller assumed control.

Schiller’s July 17 separation agreement sheds some light on why he ran a besieged company for over three weeks without an employment agreement in force. Recall that the then CFO resigned in April (after the high-profile Allergen acquisition bid collapsed) to pursue other interests.

The July agreement paid Schiller $2,500 per month for consulting and allowed 100,000 “performance restricted stock units” to vest on Jan. 31, 2016, giving him over $9 million worth of reasons to work (temporarily) for less than the salary of an assistant manager at a fast food restaurant. Each unit converts into one freely tradable share.

Why Valeant would not state that Schiller’s employment agreement would be disclosed after his 100,000 units vested is unclear. An email seeking comment from the company’s public relations adviser, Sard Verbinnen’s Renee Soto, was not responded to.

From a narrow point of view, Schiller’s new contract appears fairly standard; it paid him $400,000 per month for a two-month term ending on March 6. What happens then, however, is unclear. It certainly opens up a Russian nesting doll of questions: Is Michael Pearson seeking to return? If so, will there be disclosure about the root causes of his multi-month absence? If he can’t or won’t return, what criteria is the board of directors using to evaluate Schiller over a 60-day period?

Despite Schiller’s having $9 million in salable stock and a handsome salary on top of that, the money is unlikely to be much comfort for Schiller, given the looming date of his Feb. 4 for his appearance before the House Government Oversight and Reform Committee to answer questions about Valeant’s drug pricing strategy A Feb. 2 memorandum from the committee’s Democrats suggests that Schiller’s welcome will not be a warm one. Containing some unflattering excerpts culled from the more than 75,000 documents Valeant produced in discovery, it shows, among other things, that the company pursued transactions simply for the ability to raise prices. The memorandum did not try to hide the Democrats’ contempt for Pearson, mentioning him eight times in the seven-page document.

Corrections: The initial version of this story misstated the value of Howard Schiller’s restricted stock unit grant and inaccurately connected him to Valeant’s brief-lived office of the chief executive. The story has been corrected and updated. 

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The Curious Case of Mr. Pearson’s 502,996 Shares

On Valeant Pharmaceuticals’ conference call on Nov. 10, embattled chief executive J. Michael Pearson offered several defenses of his company’s internal controls and procedures.

Similarly, in defending both himself and Valeant from the now constant drumbeat of controversy, one of Pearson’s constant refrains has emphasized his commitment to transparency.

A March 11, 2014, Securities and Exchange Commission filing suggests Pearson and Valeant have a long way to go on both of these fronts. Put bluntly, a footnote in a Valeant filing more than 18 months old appears to show how Pearson made a handsome profit through what is referred to as an unspecified “error.”

How handsome? Thanks to a rocketing stock price and corporate opacity, Pearson picked up a block of stock for $20 million less than it was then worth.

(Southern Investigative Reporting Foundation readers will recall its Oct. 19 revelation of the company’s secretive relationship with Philidor, its captive — and soon-to-be shuttered — specialty pharmacy that kicked off this trauma for Valeant. On Oct. 25 a follow-up story was released.)

Let’s start with why this is a truly unusual document for a Form 4, an often ignored class of company filings that disclose corporate insider share purchases and sales. Traditionally, the value of Form 4’s are usually interpreted in connection to a broader context or event, like executives selling into a potential corporate share repurchase or their buying shares because of an improving sales outlook.

In this case, given the unusually heavy weighting Pearson’s compensation plan has toward share price appreciation, a March 2014 Form 4 filing noting his acquisition of 502,996 restricted stock units — shares awarded only when share price appreciation triggers are met — was to be expected given Valeant’s then soaring stock price.

But then take a look at the filing’s footnote No. 2: “On May 24, 2013, the Registrant delivered 502,996 vested performance share units (the ‘2010 PSU Grant’) to Mr. Pearson in error. In connection with Mr. Pearson returning to the Registrant the value of such shares on the date of delivery (plus interest), Mr. Pearson has been credited with 502,996 vested share units to be delivered to him in accordance with the terms of the original 2010 PSU Grant.”

The awarding of 502,996 shares to Pearson “in error” is difficult to imagine for anyone who understands the compartmentalization of a large company.

Valeant is a large, fully-staffed corporation and Pearson’s compensation is closely scrutinized by both its board of directors and lawyers. As such, any clerical error would likely have been immediately caught.

Notwithstanding the error, there is no filing detailing the initial grant. The only mention  of the block prior to March 2014 is found buried in a footnote on page 32 of Valeant’s 2013 Proxy noting that the 502,996 RSUs had met their vesting triggers. Previous RSU grants, especially one for 486,114 shares in 2011, don’t seem to have generated any problems.

What we can say is that this is the kind of mistake that happens all too rarely in the professional lives of most people. On May 24, 2013, the date of the initial–and errant–restricted unit award Valeant’s share price was $84.47; on March 11, 2014, the stock closed at $139.96, a difference of $55.49. According to the footnote, Pearson appears to have rectified the error by writing a check for the “value of such shares on the date of delivery.”

The footnote’s language suggests that “the date of delivery” is May 24, 2013, meaning that sometime before March 13, 2014 — the date of the Form 4’s filing with the SEC –Pearson wrote a check for about $42.48 million (plus an unspecified interest rate) to own a block of Valeant shares that was then worth over $70.39 million, a nearly $28 million differential.

It’s not clear if these shares were part of the block of 1.3 million shares (out of 2 million originally) that Pearson had pledged to Goldman Sachs for a $100 million personal loan. The shares were seized by Goldman last week when he was unable to make an October 30 margin call.

The Southern Investigative Reporting Foundation requested comment from Valeant through Renee Soto at Sard Verbinnen, its outside public relations adviser. She said the company would not comment beyond its previously made disclosures. A follow up phone call was not returned.