The Valeant Pharmaceuticals saga promised a new chapter on Friday as short-seller Citron Research announced it would Monday release a second report on the beleaguered Canadian pharma that promised to be “dirtier than anyone has reported.”
Shares of Valeant, which earlier this year took a turn as Canada’ most valuable stock, fell sharply on October 20 after Citron released a report that called into question the transparency of Valeant’s relationship to a U.S. specialty pharmacy, Philidor RX. The piece, entitled “Valeant: Could this be the Pharmaceutical Enron?”, raised serious questions about the company’s disclosure and accounting policies.
There are lots of opinions today after the potential negatives in Valeant’s business model, mostly in the form of a recent string of downgrades and price target cuts from analysts north and south of the border.
In March, however, a few months before Valeant’s market cap surged passed the Royal Bank of Canada’s, there weren’t many observers who had a problem with it. But one prominent investor was throwing some serious shade on the company.
“Valeant (VRX) is like ITT and Harold Geneen come back to life, only the guy is worse this time,” said Berkshire Hathaway Vice-Chairman and Warren Buffet right-hand man Charlie Munger at a meeting for the Daily Journal Corporation, a small newspaper company for which he serves as chairman.
Munger, says Forbes writer Josh Brown, was referring to Valeant CEO J. Michael Pearson and his management consulting background. Before Valeant, Pearson was worked for McKinsey & Company in 1985 for 23 years. Brown says the kind of dealmaking that characterizes Pearson’s style is a throwback to another era.
“Pearson is no scientific wunderkind, nor did Valeant have any breakthrough drug hit the shelves during his tenure,” notes Brown. “Instead, the company’s rapid success could be chalked up to aggressive dealmaking of the sort we haven’t seen since the late 1990s heyday of Tyco and Dennis Kozlowski.”
Munger, presumably, sees parallels between the way Harold Geneen put together ITT and the way Pearson is constructing Valeant.
“Geneen used cheap debt to finance these acquisitions, which later proved to be the company’s downfall,” explains The Motley Fool’s Nelson Smith. “After Geneen’s retirement as CEO in 1977, subsequent CEOs spent much of the next two decades paying off the debt by selling most of Geneen’s acquisitions.”
During Geneen’s tenure, ITT bought hundreds of companies, including Wonder Bread maker Continental Baking, the Sheraton Hotel chain, Avis Rent-a-Car.
Smith says that “on the surface” Valeant looks a lot like ITT did, noting that the company has made 30 different acquisitions since 2010. But Smith also says he is not sure Valeant is “anywhere close to being as bad as ITT was,” because all Valeant’s acquisitions have been made in one industry rather than spread across multiple spaces.
“There’s also a bit of hypocrisy coming from Munger on this issue,” says Smith. “Munger is actively involved in a company that does pretty much the same thing as ITT did back in the 1960s. Sure, Berkshire doesn’t use much debt or engage in hostile takeovers, but Berkshire and ITT have more in common than Munger is willing to admit. Both attempted to dominate the business world using a roll-up acquisition strategy; Buffett and Munger were just a little more patient with their plan.”
Geneen’s dealmaking persona followed him, literally, to the grave. His 1997 obituary in the New York Times took particular note of it.
“He was called a great leader but was also a corporate autocrat who treated foreign governments like subsidiaries. He was a man, some said, who would have bought up the world if given the chance,” said the Times.
Below: Charlie Munger’s Top 10 Rules For Success…