Valeant CEO job could yield $500M for Papa, but $67M is more likely

Joseph Papa

What’s the going rate for taking over a company in the financial equivalent of the ICU? Apparently, more than $67 million--and up to $500 million if the patient regains its former vigor in the stock market.

Incoming Valeant CEO Joseph Papa signed on to the company with a $1.5 million salary and a $2.25 million cash bonus that could double depending on performance. He also nabbed a signing bonus of $8 million to make up for lost pay at his former employer, Perrigo.

So far, that’s $11.75 million, or $14 million if Papa’s bonus maxes out. But as usual with executive pay, it’s the equity awards that form the bulk of any package, and Papa’s stock and options would be worth $56 million at today’s share prices. Total: $67.8 million, or $70 million on the high end of Papa’s bonus.

And true to Valeant form, those equity awards could pay out many times over if the company’s share price resumes its previous trajectory. Papa’s share awards vest at his four-year anniversary, and at that point, the higher the stock price, the more shares he gets.

Here’s how it works: Valeant gave Papa 933,416 stock units that vest according to performance. If Valeant stock, now trading at around $37 per share, hits $150 by that time, Papa collects every one of those PSUs. Higher stock price? More shares, up to twice as many; if Valeant stock reaches $270, Papa’s PSUs yield 1.86 million shares.

And that many shares at $270 per? More than $500 million.

Since Valeant’s now-ex-CEO J. Michael Pearson moved into the doghouse last year, market-watchers have questioned whether his pay metrics were too aggressive. Perhaps rewarding big leaps in stock price led Pearson toward some poor decision-making--such as hiking the prices of newly acquire drugs by fivefold or more, as he admitted Wednesday at a Senate hearing.

Valeant’s board didn’t buy that argument, if Papa’s compensation plan is any evidence. It obviously offers huge rewards for huge increases in share price. In its SEC filing Wednesday, Valeant argued that the restrictions on Papa’s shares after they vest--namely, a required holding period--gives him incentive to work on the company’s long-term health rather than his own short-term payoff. But Pearson’s share grants came with holding periods, too.

Realistically, the prospect of Valeant regaining its momentum--either in terms of sales growth or share appreciation--seems rather thin. It’s saddled with debt that now carries higher interest rates and fees because of tardy regulatory filings, and it could still go into default if the company doesn’t meet extended filing deadlines. Its new debt agreements limit its M&A prospects, capping any buyouts to $100 million until debt ratios are down and requiring the company to use the proceeds of asset sales to pay down debt rather than make more deals.

That means its growth-by-M&A strategy is effectively done, at least for now. Its other growth engine--opportunistic price hikes on its portfolio meds--is also out of fuel, what with Congress, politicians, the media, patients and the broader public all watching its list prices for upward movement.

Meanwhile, the company is still dealing with federal investigations of its pricing policies and of its dealings with Philidor Rx Services, the specialty pharmacy that entered the spotlight last year just as the pricing controversy heated up. Short seller Citron Research picked up on some accounting irregularities at the time, and, in a public report, accused Valeant of using Philidor to falsely pump up its sales numbers.

Partly because of its tangled relationship with Philidor, Valeant is still working on those delayed financial filings, and it has already said it would restate earnings because of related accounting problems.

With Papa, Valeant can claim a new era, a fresh start. Shareholders bleeding from the stock’s sudden and dramatic fall might be happy for Papa to do whatever it takes to regain them their returns--and happy to pay him half a billion dollars if he succeeds. Just how far the new Valeant--Papa’s Valeant--is willing to go to heal itself will be the big question this year.

As if to answer that, reports surfaced Thursday that five Valeant directors would step down to make room for new blood on the board. According to media reports, the four replacements would be drawn from traditional pharmaceutical companies, presumably bringing more traditional pharma thinking with them.

- see the Valeant filing

Related Articles:
It's official: Pearson is out, Papa is in as Valeant CEO
Valeant close to announcing Perrigo's Papa as new CEO: WSJ
Senate committee grills Valeant CEO Pearson for 9 hours: Bloomberg
Valeant heeds calls for new CEO
Ex-Sanofi, Schering CEOs were on a short list to replace Valeant chief Pearson: WSJ

Pictured is Joseph Papa, courtesy of Smith & Nephew.