Drugmaker Valeant Pharmaceuticals (NYSE:BHC) has had a really rough go of things over the past year. Since peaking at approximately $264 a share last summer, shares of the once nearly megacap company have fallen back into mid-cap status.
At the heart of Valeant's issues are its pricing practices under the leadership of now-former CEO J. Michael Pearson. Valeant acquired two cardiovascular drugs, Nitropress and Isuprel, in Feb. 2015 and enacted 525% and 212% price increases on them without changing their chemical formulation or the manufacturing process. These price hikes were met with outrage and claims of price gouging.
Meanwhile, the company's monstrous debt load, which stood at $30.77 billion at the end of the second quarter, has put the company in a bind. As a company built on mergers and acquisitions, a lack of access to additional credit and a substantially reduced EBITDA forecast have left Valeant in a bit of a pickle.
Who put Valeant in this pickle in the first place? The fingers should logically be pointed at Pearson and his management team, which made the drug pricing decisions and also dug Valeant into a deep debt hole.
This has to be infuriating for shareholders
Shareholders typically look to management to be a contributing factor to a company's success, not a distraction. However, with Valeant, we've witnessed quite the opposite recently. But, it gets even more infuriating for shareholders. Despite Valeant's share price diving nearly 90% from its peak, Valeant's management team has been cashing in.
As reported by The Wall Street Journal on Aug. 23, Valeant's new chief financial officer, Paul Herendeen, who's coming over from animal health giant Zoetis, will be getting a big payday. Herendeen will be receiving a base salary of $1 million and can earn a bonus of up to $2.4 million. Valeant also gave Herendeen $10 million in cash to make up for compensation he gave up by leaving Zoetis. Comparatively, Herendeen was receiving a $630,000 base salary at Zoetis as of 2015 and a bonus of $595,350 per a proxy filing.
We saw an even more robust pay package offered to new CEO Joseph Papa, who came from over-the-counter drug giant Perrigo, which he ran for a decade. Papa is getting (and I hope you're sitting down for this) $67.4 million in pay for 2016. This includes a $1.5 million base salary, a target bonus of well over $2 million, a special $8 million cash payment to compensate him for his unvested shares of Perrigo, and $56 million in restricted options and stock, some of which vests over the course of the next four years. If Valeant's stock were to somehow see $270 a share, Papa could net $500 million thanks to performance-based compensation.
Even outgoing CEO Pearson will make quite the bounty. He'll be paid a salary of $2 million in 2016, despite only working for Valeant for part of the year, and he's eligible for a target bonus of $4 million, which is mainly associated with helping the new CEO, Papa, get on track. Had Valeant's stock not plunged as much as it did, Pearson would have netted more than $25 million in share-based compensation as well.
Is Valeant losing sight of what really matters?
On one hand, the need for Valeant to get seasoned leaders on its management team to guide the company through some very rough seas is understandable. I'm also not against stock-based compensation in the sense that a small amount of share compensation or options helps further align the goals of management with those of its shareholders. If stock prices rises, both management and shareholders earn more.
However, management appears to have thrown caution to the wind, here, with more than $30 billion in debt on the books and an urgency to sell assets to please its secured lenders. Remember, after uncovering improperly recognized revenue from Philidor Rx Services in 2015, Valeant was forced to go through its financials with a fine-toothed comb, ultimately causing the company to be late with both its fiscal 2015 annual report filing and its Q1 2016 quarterly filing. Valeant was thankfully able to secure concessions from its lenders despite the late filings, but it agreed to pay a $50,000 fee for every $10 million in loans, as well as a one percentage point higher interest rate, in the process. Call me crazy, but spending millions on executive compensation, even if it is performance-based, seems like an infuriatingly bad way to conduct business when your company is in a veritable cash bind.
As an addendum, I'll say Valeant is far from the only company whose management team is being paid a king's ransom. Executive compensation is an ongoing talking point among Wall Street and Capitol Hill, so it's not just Valeant that deserves the finger-pointing. However, if your company has nearly $30 billion in net debt, drawing attention to yourself via exorbitant pay packages is likely not the smartest move.