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Icarus melting

6 November 2015 By Robert Cyran

Valeant Pharmaceuticals Chief Executive Mike Pearson has been called on his $100 million excess. That’s how much stock he put in hock to do everything from paying taxes to donating to charity to buying more shares in the company – he even helped finance a community swimming pool.

Now he has been forced to repay the debt. Compensating bosses in equity is supposed to nudge them to serve shareholder interests. In this case it serves as an apt example of the skewed incentives that have rocked Valeant.

The pharma giant required that Pearson buy a substantial amount of stock when he took the job in 2008. It then granted him lucrative restricted equity worth $4 for each $100 of value created on his watch. The board made more such grants in subsequent years so that essentially all of Pearson’s pay came in equity and cash incentives tied to performance.

Pearson owned about 3 percent of Valeant as of its last proxy statement. His serial-acquisition strategy yielded riches for a while as the stock rose about 20-fold since he took over. The fact he has never sold any of his holdings makes the story seem even more appealing to those investing alongside him. One reason he has kept his shares, though, is because the company allowed him to use his stock as collateral to borrow money.

That can distort executive incentives. In Valeant’s case, management’s focus on rapid share appreciation has played a role in its aggressive accounting and M&A strategy. Investors have now grown disenchanted with the results and are questioning whether Valeant has grown too fast. The company’s involvement with a specialty pharmacy that has been accused of seeking improper insurance reimbursement and altering prescriptions has added to investor skittishness. The stock has lost 70 percent of its value from its high.

The drop prompted Goldman Sachs to call Pearson’s loan and sell 1.3 million of shares it held as collateral. That has put investors even more on edge, not helped by the company’s silence about whether the stock sale occurred during a blackout period, when executives can’t sell. It’s a mess that better board oversight could have prevented.


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