We just got our best sense of what’s been going on behind the scenes at embattled Canadian pharma company Valeant.
The headlines Monday are focused on the impending departure of chief executive Mike Pearson, and the appointment of billionaire investor Bill Ackman to the company’s board.
Recall that Valeant, and Ackman who is one of the company’s largest shareholders, have lurched from crisis to crisis for months: everything from its business strategy to its accounting practices have been questioned with regulators and lawmakers investigating some of these.
The statement announcing Pearson’s departure revealed a great deal about the company’s broader problems, how it got to this point, and who Valeant’s board wants to blame. And it reminded us of a hedge fund manager’s prescient comments on Valeant’s leadership, made last month.
The improper conduct of the company’s former Chief Financial Officer and former Corporate Controller, which resulted in the provision of incorrect information to the Committee and the company’s auditors, contributed to the misstatement of results.
The statement also said that the board had asked Howard Schiller, the former CFO, to tender his resignation as a director, but that he had not done so.
As we were reading it, we couldn’t help think about some comments from Wally Weitz, founder and portfolio manager at Weitz Funds in February. Weitz sold out of the stock in October as a result of his concerns about company:
He said of Valeant:
It worked beautifully. The stock went from 30 to… peaked out around 240 or 250, and I think early on at a dinner with Mike Pearson several of us came out to New Jersey and went to dinner, and he said something. We asked, ‘How do you manage such a far-flung enterprise? You have businesses all over the world,’ and he says, ‘It’s easy. We just get people to run them that…we tell them, ‘Make your numbers or we’ll get somebody who will.’
That was sort of chilling to me, because I think an awful lot of the corporate blowups over the years, whether it’s Enron or whatever, maybe start off as legitimate companies that are well run, but when there’s pressure from the top to make the numbers, sometimes people succumb to that and bad things happen. So I was sort of on guard about it.”
It seems Weitz was on to something. In an 8K statement Monday morning, Valeant said yes, there had been a lot of pressure from the top down, and that this may have played a part in some of the issues it is now facing.
As part of this assessment of internal control over financial reporting, the Company has determined that the tone at the top of the organisation and the performance-based environment at the Company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the Company’s improper revenue recognition and the conduct described above.