Valeant Pharmaceuticals is Soldiering On

There's a word you hear a lot at West Point: huah.(It's the word Al Pacino rode to an Oscar as the retired Infantry colonel in Scent of a Woman.) Huah is an all-purpose expression. Want to describe a cadet who's very gung-ho, you call them huah. Understand instructions, say huah. Agree with what another cadet just said, murmur huah. Impressed by someone else's accomplishment, a soft reflective huah.

The explanation comes from the pen of David Lipsky, a contributing editor for Rolling Stone, who found himself against his wishes saddled with an assignment to write about the United States Military Academy. The product of an anti-military upbringing, Lipsky had some preconceived unfavorable notions about the academy, which were promptly validated when West Point's public affairs office insisted that the reporter's interviewees be hand selected (not by Lipsky) and conversations monitored. Finding the conditions unworkable, Lipsky opted out of the assignment, only to receive a call a few days later from a West Point colonel singing a different tune: Lipsky was welcome to talk to whomever he wanted, whenever he wanted. West Point had nothing to hide.

The result was Absolutely American: Four Years at West Point (Vintage Books, 2004), an account of Lipsky's four years spent among the academy's cadets. The book tells an entirely different story from the one the author assumed he'd tell. Lipsky discovered that West Point fosters hard working, selfless, intelligent men and women, not unnecessary harshness and hypocrisy. It's the kind of thing many in the pharmaceutical industry wish would be revealed about them. If someone wanted to write that book, they could do far worse than to start by talking to Tim Tyson, a West Point graduate and CEO and president of Costa Mesa, California-based Valeant Pharmaceuticals.

Inspired Decision: Bary Bailey, CFO (left), and Chuck Bramlage, president of Europe, are two members of Valeant's revamped management team. Each joined, in large part, because of Tyson.

Until almost a year into Tyson's tenure, Valeant (in name) didn't exist. It was ICN Pharmaceuticals, a famously tainted company whose founder and ex-CEO, Milan Panic, was known less for developing medicines, and more for his involvement in sexual harassment lawsuits and insider trading. After fed-up shareholders forced Panic out in June 2002, a new management team began arriving. In November 2003, ICN undewent a major rebranding effort, part of which involved changing the company's name. (The new name, Valeant, was inspired by the Latin prefix val, meaning strong and healthy.) Today, Valeant has entirely new leadership, eight thousand fewer employees, a company-wide program underway to increase efficiency, and four late-stage pipeline products in development. Intent on sticking to the strategic plan it put in place at the beginning of 2003, the $683 million-a-year (2004 revenues) specialty pharma company is committed to doubling sales to $1.4 billion and tripling earnings to more than $1.90 per share by 2008. Huah.

Commanding Opportunity

Tyson arrived at what's now Valeant in December of 2002 from GlaxoSmithKline, where he worked for 14 years, most recently, as president of global manufacturing and supply. Interim CEO and chairman Rob O'Leary recruited Tyson to join the company as chief operating officer with the understanding that he would be groomed for the top job. He officially took over as CEO and president (O'Leary remains chairman of the board) in January 2005.

"I wanted the opportunity to run my own show and work with people I had regard for," Tyson says. "In life, you always say, 'I'd be so great if I had the chance to work together with a certain group of people.' This was that opportunity."

Growth Strategy

But why ICN, a company embroiled in lingering lawsuits and notorious for doing bad business?

"ICN had a platform that was able to be restructured to deliver some easy, near-term profits and a future big opportunity," Tyson says, referring to Valeant's most promising pipeline product, Viramidine (taribavirin). Viramidine, a treatment for hepatitis C, is a pro-drug that is converted by an enzyme in the liver into ribavirin.

Ribavirin was Valeant's main source of revenue until April 2004, when it went off patent in the United States (see "Battle Ahead" section below). "The company had about $700 million in sales," says Tyson, "and $300 million in royalties [from Schering-Plough, which licensed the drug and sold it under the name of Rebetol]. Take the $300 million in royalties away and look at the next level: That $700 million in sales was costing over $900 million to generate. It was losing money."

From the perspective of a turnaround, that was an advantage. "If you looked at what that $900 million was being spent on," Tyson says, "my feeling was that it would be pretty easy to reduce that without doing anything beyond restructuring and giving some efficiency in the operations. I figured that if you get the right people involved, good people make good things happen."

Born in Hornell, New York, Tyson left his hometown at 14, when Hornell's lifeblood, its railroad, went bankrupt and put his dad out of a job. His family moved to Ithaca, where Cornell University is, so Tyson's father could get a computer-programming job at the college. Inspired by his Marine dad, Tyson went to West Point (class of 1974) and later served five years in the Army. He remained in the reserves and went to work as a manufacturing manager for Procter & Gamble. From there, he joined Bristol-Myers, where he worked throughout the eighties, holding posts in both R&D and operations. Tyson has been married to the same woman, his sister's best friend from high school, for 31 years. Together, they have a 29-year-old son, a corporate film producer living in New York City whose wife works for the Metropolitan Museum of Art.

The matter-of-fact simplicity with which Tyson describes his background makes believable the notion that he'd let instinct guide him in taking the reins of a company teetering on the edge. But don't be fooled by the CEO's down-home demeanor. He has another side—a meticulous, deliberate attention to detail that shows in his remarkable posture, the way he pauses before every answer, and how he refuses to so much as glance at a cell phone that vibrates while he's mid-sentence. It helps explain the disciple-like loyalty displayed by his subordinates, many of whom gave up posts as CEOs or presidents to join Tyson at Valeant. "We are at Valeant for Tim Tyson" rolls off the tongues of senior management like a mantra.

Trading white coats: Valeant's head of R&D, Kim Lamon, followed in his father's footsteps by becoming a doctor. But the business side of science proved to be his great passion.

Course of Action

Tyson spent his first two years at Valeant working with O'Leary on creating a restructured strategy and management team to lead the company in a new direction. In a nutshell, the plan was to have the current machine fund the future machine, to maintain base business at a rate that afforded bringing new products to market. The strategy had three parts:

Restructure The company would shed unprofitable or mismatched parts of its business to create a clear focus on specialty pharmaceuticals. It would significantly streamline its manufacturing and G&A operations, and divest unprofitable subsidiaries. Worldwide sales force operations would be reworked to reflect the new priorities.

Transform In addition to the most obvious transformation—new faces in senior management and a corporate rebranding effort—ICN would institute several new corporate governance initiatives to increase transparency, establish greater board independence, and change the way the company did business. It would reclaim full ownership of its R&D subsidiary, Ribapharm (part of which had been spun off by Panic before his departure), regaining full rights to Viramidine and underscoring a renewed dedication to discovering new medicines.

Innovate and grow By shifting resources garnered from cost savings in stages one and two of the strategy, the company would turn its eye toward business development, commercializing pipeline products in three disease categories—neurology, infectious disease, and dermatology.

From One Come Many

How did ICN plan on accomplishing all this? For starters, by hiring what Tyson calls "a group of seasoned professionals with significant experience and knowledge, and a past record of exceptional performance." He worked his Big Pharma connections—and, for those he hadn't worked with in the past, his eminent leadership qualities—to attract his new team.

Tim Tyson

The first was CFO Bary Bailey, who until Valeant, had never worked at a pharmaceutical company (he comes from a hospital services and PBM background). It was O'Leary who initially presented the idea to Bailey, but Tyson who Bailey says is the real reason he decided to get acquainted with pharma by way of one of the industry's most corrupt companies.

"The things that you can learn from an individual with Tim's background—that was the driver. I've been able to attract people [to finance] not because of my charismatic character, but because of Tim," Bailey says, with a touch of self-deprecation.

When you first meet him, Bailey looks like a stereotype of an accountant. In glasses and suspenders, he'll sit silent for minutes at a time, giving the impression that he is shy—or perhaps scanning for signs of trustworthiness. But then the defenses come down, he lightens, starts cracking jokes, and unveils a side that makes you wonder how he ever wound up crunching numbers for a living. By the time he gets around to telling you about his four sons, you realize Bailey's a big kid himself, the dad who means it when he cracks up at his kids' jokes, the guy in the boardroom who understands that even in business, sometimes things need to be laughed off.

Wes Wheeler is the guy who fixes things. As president of North America and global commercial development, Wheeler is responsible for Valeant's operations in the United States, Canada, and Puerto Rico, where he also leads business development and marketing.

Wheeler came to Valeant after a stint as CEO of DSM Pharmaceuticals, where he led the organization through a complete business turnaround by creating a new leadership team, launching new business metrics, rebranding the company, fulfilling all regulatory obligations, and significantly increasing new business and profitability. Sound familiar?

He and Tyson worked together for years at Glaxo, where he was senior vice president of logistics and strategy. The two orchestrated the manufacturing merger between Glaxo Wellcome and SmithKline Beecham.

"When GlaxoSmithKline came together, Tim and I were involved in all the manufacturing rationalization for 109 plants. He and I went to almost all the factories," scattered throughout 41 countries, Wheeler says. "Once you've done some tough stuff, it's hard to go back to a normal functioning company. I love turnarounds. I loved the fact that it was a screwed-up mess."

Wheeler's at Valeant because he thrives on the challenge. But he's also there out of utmost devotion to his leader. Whenever possible, he'll divert the spotlight from himself or his teammates onto Tyson. Sometimes, when his boss succumbs to his innate struggle to elaborate on himself, Wheeler picks up the pieces.

For example, when Tyson lets slip that he was in a rock band in high school, Wheeler relates a fuller version of the story: "Tim used to run the sales force at Glaxo. At the time, we had about 4,000 reps. We'd have about half of them gathered in the room, and Tim would get up and play the guitar and sing. I have seen Tim introduce some pretty big-shot guys, like Colin Powell and other celebrities, but you never got as big a rise out of the sales force as when the president got up and started playing the guitar."

If Wheeler came to Valeant primarily for Tyson, Kim Lamon, the company's president of R&D and chief scientific officer (CSO), was attracted by the science. Lamon makes no mention of Tyson in describing how he arrived at the company, a process to which he refers as "The ICN Saga." The former internist and pharmacologist first joined ICN in August 2002, when a dissident shareholder asked him to replace a recently ousted board member. Lamon was later named president and CEO of ICN's Ribapharm subsidiary in January 2003, and appointed president and CSO for Valeant upon its reacquisition of Ribapharm in September 2003.

Lamon first got his taste of the business end of things as corporate senior vice president and group president of Covance Clinical and Periapproval Services. "I have always liked the interface of business and science. I am not one of those medics who thinks they are incompatible." Immediately before moving to Valeant, Lamon was president of SciPharma Consulting, which consults to the biotechnology, diagnostics, and pharmaceutical industries.

He took the plunge because of what he saw below the surface. "The appeal was partly the science—the self-funded, doing-it-the-way-you-know-is-the-right-way part," Lamon says. "I had been doing R&D, but I also was involved in mergers and acquisitions and trying to get R&D groups to work with companies. As a consultant, I was doing that with smaller companies. When I got here, I thought, 'How would I like doing this, but on a billion-dollar scale versus a 10-million-dollar scale?'"

As far as most investors and analysts are concerned, a big question mark still looms over whether Valeant will in fact become a billion-dollar-a-year company. "Investors have been continually skeptical on a lot of fronts," says Rich Watson, analyst for William Blair & Co. "The real question in terms of not just turning around, but also growing into a major pharma company, is whether Valeant can succeed in commercializing the pipeline as it exists today. That's the part of the equation that should be up for debate."

At the same time, it's the undying reluctance of Tyson, Bailey, Wheeler, Lamon, and the eight other members of Valeant's senior management team to entertain that very debate that makes it hard not to take the company seriously.

"We won't be the same company in a few years," says Chuck Bramlage, president of Valeant's European operations. "Either the pipeline hits, or through our board members there will be opportunities to merge. I don't care how it looks, whether with products from other companies or together with other companies, but this management team can do it. We always talk about $1.4 billion, but I am sure we can be a lot bigger than that."

Leaner and Meaner

Aware that the Street is more swayed by metrics than the huah spirit that embodies Valeant's inner circle, the company is doing its part to quantify success. As part of the restructuring phase in the turnaround, Valeant introduced a company-wide Lean Six Sigma initiative.

Six Sigma is a statistics-based, quality-improvement methodology originally designed for manufacturing and made famous by the cost savings it generated for such early adopters as Motorola and General Electric. The goal of the methodology is to reduce the number of defects that occur in a given process, eliminating inefficiencies and unwanted costs, thereby improving quality. Lean Six Sigma is a variation of the methodology that prioritizes process flow and speed.

Despite widespread adoption of Lean and Six Sigma throughout the business world, the pharmaceutical industry has been slow to respond. Many pharma companies—GlaxoSmithKline, Johnson & Johnson, and 3M, to name a few—have implemented Six Sigma strategies on a project or departmental basis. But few (only one, if you ask Valeant) have taken a holistic approach.

"In pharma, we see a lot of people play around with Lean and Six Sigma," says Robert Blaha, president of Human Capital Associates, the Six Sigma consulting firm hired by Valeant to help implement the initiative. "They do some projects. They push the envelope around the table. But at the end of the day, this stuff really has to be the way you think. It's about changing a lot of the fundamental ways pharma has run for decades. That takes leadership relentlessly pursuing it."

While Tyson is quite proud of Valeant being what he says is the only pharma company pursuing Six Sigma in all parts of its business ("Nobody but us is doing it across the whole company"), he believes industry overall would benefit from the approach.

"We are fat, dumb, and happy," he says. "That's the problem with pharma. We've made too much money on margins, and it's been too easy to increase profits by making double-digit sales and increasing prices two or three times a year. We're not focusing on efficiencies."

Valeant says it generated over $10 million in savings for the first full year it adhered to Lean Six Sigma principles. That figure excludes reductions made in factory staff and discontinued operations. When Tyson first joined the company, it had 12,000 total employees. Today, there are about 3,700. The majority of the cuts came in manufacturing, which at the time of Tyson's arrival employed 8,000 people in 33 factories throughout the world. Today, Valeant has about 1,800 people working in eight plants. By the end of 2006, the manufacturing headcount will be even lower, as the company plans to shut down plants in Montreal and Brazil. The long-term goal is to knock the number of plants down to four, bringing the manufacturing headcount to 1,300—less than 20 percent of what it was when the turnaround began. (Tyson expects that by the time that happens, overall headcount will hold steady as the company adds sales reps. It currently has 1,000 reps worldwide, only 25 percent of whom cover North America.)

The big surprise, though, was how avidly the R&D group took to the idea of Lean Six Sigma.

"R&D groups think they're special," says chief scientist Lamon. "They think Lean Six Sigma doesn't apply. So when Tim started to gear this up, I thought, 'Uh-oh, here we go. I've got to try and sell this to this group.' But it was amazing. Even on the discovery side—they're the worst, freethinking discovery scientists—they've really adopted it. We actually had to turn people away from training." But Lamon says about 80 percent of his staff has been through a shorter operational excellence program that introduces the basics of Lean.

"People come up to Tim and ask, 'How the heck did you get R&D to do this?'" Wheeler says. "We were at GSK for 14 years and there was no way we'd have gotten R&D to do it. They'd say, 'R&D is an art. You can't put science against an art.' But we've been able to do it."

The results within R&D, according to Lamon, have been of two sorts: soft and practical. Setting and meeting benchmarks has created a motivated atmosphere throughout the department, one filled with camaraderie, not punitive competition. "I am not walking around with a whip," Lamon says, "but I see people trying to meet world records. We have a joke internally that that's what we're going to do from now on—just keep setting world records. That's the soft thing."

The more practical outcome that Lamon speaks of surfaced as the department was gearing up for its Phase III clinical trials for Viramidine. During planning stages, the R&D team had budgeted 12 to 18 months for the average enrollment time in the trials. "Historically, people hadn't been enrolled in less than 12 months," Lamon says. So R&D sent some of its trained green belts to investigator meetings to find out what typically disrupts study coordinators' ability to get things started.

"We discovered a lot of common denominator things that got in the way of enrollment," Lamon says. "So we proactively tried to come up with a system to improve study start up."

Part of that was accelerating contract preparation, a process that can hold up enrollment significantly. Valeant went through a Lean Six Sigma process of looking at contract preparation, and noting and resolving any inefficiencies that existed.

In addition to saving time, finance chief Bailey notes the cost savings involved in making such a process more efficient. "That is money, because every time you go through a contract revision, it's another set of attorneys on both sides," he says. "It also ensures that you don't find yourself saying later on, 'Oh, I wish I had thought about putting that in.' You get a much better contract for both parties. And it's done faster."

Sure enough, Valeant's R&D team shaved five months off its previous world record for enrollment, getting the first study up and running in seven months. For the second study, they cut an additional 30 days.

Battle Ahead

Valeant's destiny lies mostly in the fate of Viramidine. The drug, expected to launch in 2007, is designed to replace ribavirin, which went generic in the United States in April 2004. Through a licensing deal that pre-dated the current management team, Valeant was receiving royalties from sales of Rebetol, Schering-Plough's brand name for ribavirin, which when combined with pegylated interferon, is the standard of care for hepatitis C.

Valeant, of course, needs to replace the $300 million it was receiving from Schering. But the company claims Viramidine is an improvement on ribavirin and will reduce toxicity. The product is a pro-drug; it does not become active until acted upon by enzymes in the liver. As a result, says the company, it is better targeted to the liver, where hepatitis C replicates, less toxic to red blood cells, and thus less likely to cause anemia.

"The most critical thing to our company right now is Viramidine," Tyson says. (Valeant has not publicly stated its projections for sales of the drug, but long-term goals suggest billion-dollar ambitions.) "It's a significant improvement for treatment of hepatitis and it will be an overall less costly treatment regimen for those paying for medicines. It is a huge financial opportunity for Valeant."

Just how Valeant balances those two things—producing a less costly treatment regimen and capitalizing on the financial opportunity Tyson speaks of—is what many are calling the determining factor in the drug's success rate. And it's a factor that's difficult to predict because until now, Valeant has been making money off of a number of small, $50ish-million-per-year products. The investor community has been slow to react to Viramidine and the rest of Valeant's pipeline, in part because it has nothing to compare it to.

"One of the knocks we've always had against Valeant is that they're too diverse," says Arthur Wong, an analyst for Standard & Poor's. "We've wondered if they are going to spread themselves too thin. A company of this size that doesn't have any products over $50 million in sales is kind of weird."

Valeant is working on that. In the restructuring phase of its strategy, the company discontinued 200 (out of 600) products that were either unprofitable or inconsistent with its specialty pharma focus. From the remaining 400, it's focusing on about 20, a selection that still runs the gamut. To name a few, there's Diastat (diazepam rectal gel), indicated for breakthrough emergency epilepsy seizures mainly in children; Efudex (fluorouracil), the standard of care topical treatment for solar or actinic keratoses; Tasmar (tolcapone), for Parkinson's disease; and then there's Kinerase, an OTC fine-line and wrinkle cream for which Friends star Courteney Cox is the spokesperson.

"You don't see many specialty companies spread so thin, across so many different products," Wong says. "They are trying to find an identity."

Given the low risk involved in Viramidine, chances are good that Valeant will have the opportunity to make the drug a big part of its future identity. But an inappropriate price tag could put a ceiling on its potential.

"Valeant has said that if you give people Viramidine plus pegylated interferon, anemia is a lot less. But the key question is: How much can they charge for that luxury?" says John Savopoulos, infectious diseases lead analyst for Datamonitor. "At the moment, you have very cheap ribavirin. If Valeant makes Viramidine 50 percent more expensive, doctors are only going to use it for second-line use, only on patients with anemia. If they go to the market with something stupidly expensive, physicians won't go for it."

Watson, of William Blair & Co., disagrees. "Doctors always talk about pricing, but when push comes to shove, they are completely price insensitive," he says. "What's going to determine the success of this drug is its clinical data. If it demonstrates superior efficacy to ribavirin, I think it will be wildly successful, regardless of price—within reason, obviously. You can't price it at triple what ribavirin costs, but you can price it at a premium."

Under either scenario, Viramidine's approval will be a big boon for Valeant. Most analysts are predicting sales of at least $300 million. But as Wong points out, "Even if Viramidine only generates $100 million, it's still them proving to everyone that they can conduct a large-scale trial and get a product out. It shows that the machinery is working."

Not to mention, Viramidine is just one of four late-stage products in Valeant's pipeline:

Zelapar (selegiline), which Valeant acquired in February 2004 when it bought Amarin Corporation's US operations for $56 million, is a treatment for Parkinson's disease. Last month, Valeant received a second approvable letter from FDA regarding Zelapar that requested additional clarification on issues already addressed by the company in its response to the first approvable letter.

Retigabine, in Phase III, is an adjunctive treatment for partial-onset seizures in patients with epilepsy. Valeant acquired the drug when it purchased Xcel Pharmaceuticals in March 2005 for $280 million. The company is predicting sales of more than $500 million for epilepsy alone (epilepsy drugs are often used for other indications) and a late-2008 launch.

Pradefovir is a synthetic nucleotide (adenosine) analog for the treatment of patients with chronic hepatitis B. In October 2001, Valeant entered a development and license agreement with Metabasis Therapeutics, the drug's maker. Under terms of the deal, Valeant is primarily responsible for the clinical development and registration of Pradefovir, currently in Phase II.

Although outsiders are impressed with what Tyson and his team have accomplished so far, the mystery surrounding most of what Valeant is banking on has left many on the fence about whether the company can live up to its ambitious long-term projections.

Those inside Valeant, however, could not be more firmly situated on the side of certainty.

"We don't have a flavor-of-the-day strategy," Bailey says. "The three-point strategy has been a theme since we joined this company. If you heard us back then, you would have heard the same things you're hearing today: We have a focus, we're targeted toward that, and we're all here for the long term. Some companies have an eight-year turnaround time. We're already done with that. We're already on to the growth."

Tyson clearly envisions a grand destiny for Valeant, seemingly convinced that anything short of attaining it would controvert the natural order of things. "When I joined Glaxo, they had just achieved $500 million in sales," he says. "Now it's a $30-billion-a-year-company. Zantac was the product that put them on the map. Right now we're a $700ish-million-a-year company. We're looking for our brand-name launch that has the potential to be as big as Zantac."

But when asked to reel his reflections a little closer, to comment on what impresses Tyson about his individual achievement, the man who most give as their reason for being at Valeant at all appears befuddled—embarrassed even.

He manages, "I'm always amazed by the opportunities that I've had—people I've met, places I've seen. I thought the world was 15 miles outside of Ithaca. The important thing to me is that I know where I came from, and if not for a few things, I could be right back there."

When Tyson talks, whether in response to a question directly posed to him or to qualify an answer initially sought from someone else, the room falls silent. His team, mostly men who admit to spending more time with their leader than their wives, listen as intently as if it were the first time they ever heard him speak.

He continues, easing slightly, becoming aware of the opportunity to do what he does best—turn the attention to his team. "If you talk to the people I went to high school with, they'd tell you I've always been concerned with people and relationships. The sum of this company is passion for people and commitment to performance. Most people have commitments, but they don't end up pulling them across the finish line. This team has a commitment to and record of pulling things across the line."

Save a few head nods, Tyson's squad sits motionless and silent—at attention. But the sentiment in the room is certain and universal: huah.