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When Fortune named Genentech the Best Company To Work For in 2006, Betsy Morris’s profile of the “low-key, high-tech biotech” touched on the free cappuccino, wacky Halloween parties (including current UCSF Chancellor Susan Desmond-Hellmann dressed as Snow White), and onsite day care, before getting to the heart of the matter. “Genentech’s secret, anybody will tell you, is its culture.”
Employees were drawn to Genentech by the opportunity to work with brilliant colleagues on cancer and other important diseases, in an informal, flat organization that valued good science and cherished creativity.
Personifying Genentech values was Art Levinson, Genentech’s “impish, brilliant scientist CEO” who assumed the post in 1995 and made a name for himself “championing its science, creating a stream of new drugs.” Morris tells us that although “Wall Street was skeptical” when Levinson took the helm, “insiders cheered. Levinson was head of research, a top scientist, and astute at making the calls on people and R&D.”
Levinson grew up in science, and aspired to drive company growth through best-in-class internal R&D. In his first two years as CEO, he “persuaded the board to plow 50 percent of revenues back into research,” and focused the company on “significant unmet needs.”
For many, Levinson’s Genentech represents biopharmaceuticals at their best: organizations staffed by the brightest researchers, drawn by the opportunity to use great science to solve important medical problems – and to have a good time in the process (successes were celebrated with parties, T-shirts, and occasionally, celebrity bands, including a “concert featuring Elton John, Mary J. Blige, and Matchbox 20”).
Now flash forward to the present: Friday’s news that eyecare giant Bausch & Lomb is about to be taken over by Valeant and its acquisitive CEO, J. Michael Pearson.
Pearson, according to a captivating Globe and Mail feature by Sean Silcoff, appears to be the mirror image of Levinson, and has built a remarkably successful company that’s in many ways the mirror image of 2006 Genentech.
Pearson, a Darden MBA, came to Canada-based Valeant by way of McKinsey, where over a two decade career he worked his way to a senior leadership position, and served as head of their global pharmaceutical practice. Called in by Valeant’s board in 2007 to help the struggling company identify a path forward, he conducted an intensive review and then announced to the board that “Your current strategy is not only not working, it doesn’t have much of a chance to be successful.”
According to Silcoff, Pearson then mapped out an alternative vision: given its limited resources, it shouldn’t be spending lots of money trying to develop blockbuster drugs like big pharmas (presumably not great role-models anyway), and should be far more selective in focus, both geographically (i.e. avoid Western Europe – low growth prospects) and therapeutically (exit cardiovascular, move into dermatology).
Dermatology, Silcoff explains, represented
“a corner of the market where Big Pharma was less prevalent, where there was big demand and no one-size-fits-all solution. Best of all, payers were primarily not governments but motivated consumers and private benefit plans. Valeant was to have a brighter future selling acne cream and other drugs that matched it profile than trying to cure cancer.”
While Levinson grew R&D, Pearson slashed it, explaining to Silcoff, “We had a premise that most R&D didn’t give good return to shareholders.” Consequently, R&D was cut 11% in Pearson’s first year, and another 50% in his second year. Instead, Valeant looked to M&A, targeting companies with small ($10M-$200M/year) products. Often these companies were off Big Pharma’s radar screen, and available at favorable valuations.
First, he pulled off a merger with a Canadian company, Biovail, in a fashion that enabled the combined company to retain favorable Canadian tax status (Note: error in original post regarding nationality of Biovail has now been corrected – h/t Will Ashworth). More recently, Pearson acquired dermatology company Medicis, for $2.6B. He’s bought several smaller companies as well. “After initially zeroing in on dermatology and generics,” Silcoff writes, “Valeant has since bought into oral care, podiatry, and vision treatments, but its offerings also include sports nutrition products, supplements, and cosmetics.”
Pearson, like any good consultant, focuses on stripping costs out of the system, resulting in a lean structure, and according to message boards, many unhappy employees. Pearson himself is paid extremely well – earning $36.7M in 2011, according to Silcoff, on top of “a pile of equity.” Notably, Pearson’s compensation is very closely tied to his performance, plus he bought $5M of Valeant stock when he joined in 2008. Collectively, this represents a skin-in the-game arrangement that, like so much of Valeant itself, seems more typical of private equity funds than of typical drug companies.
What’s most striking about Valeant’s strategy is that Pearson seems to be doing what I’ve heard so many consultants (and investment bankers) only fantasize about. For years, consultants have worried that pharma’s current model is largely unsustainable, and that there’s considerable “excess capacity” (too many employees). Most drug companies (as I’ve discussed) aren’t very good at coming up with the new products they need to sell, and many have a relatively bloated cost-structure (something that comes up every time the suggestion is floated that they might emulate consumer products companies, which run notoriously thin margins).
A riveting 2010 report by banker Andrew Baum (then at Morgan Stanley, now at Citi) proposed that pharmas (especially those not particularly good at internal research) consider evolving their model from R&D to S&D (search and discovery). While the industry has moved in this direction, it’s generally been slower and less dramatic than some had expected. In part, many companies may harbor unrealistic faith in their internal R&D programs. At the same time, I’ve heard some consultants cynically suggest that to the extent Big Pharma has any good will left, it’s due to its positioning as a science-driven enterprise. If research was slashed as dramatically as at Valeant, the industry’s optics would look even worse. (There’s also the non-trivial concern that if Valeant’s acquisition strategy were widely adopted, who would build the companies everyone intends to acquire?)
The contrasts between Levinson’s research nirvana and Pearson’s consultant nirvana (and scientific dystopia) could hardly be more striking, and frame two very different routes the industry could take. Gain your research mojo back, and you might become like Levinson’s Genentech, working on cancer cures in a gilded, intellectually stimulating environment.
Fail to produce, however, and you walk a very different path, one that’s lean and mean. You acquire companies for their acne creams and skin balms and jettison workers, motivated by a desire for profit uncoupled to the sort of broader vision leaders like John Mackey, Howard Schultz, Richard Branson, and of course Art Levinson have famously described.
I’d love to see the Genentech model prevail. I’m not sure I’d bet against Pearson.
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