Strict Cost-Cutters Who Want to Spend $45 Billion on a Takeover

Visitors to the New Jersey offices of Valeant, the ambitious pharmaceuticals company, are confronted with an unusual sight when they walk through the front door: a basketball court.

The building was previously home to a Y.M.C.A, which deemed it too run-down to host community activities. So when the Y.M.C.A. moved to a new building, Valeant moved in, setting up rows of cubicles on one-half of the basketball court and using the rest as a lobby.

Most other companies of Valeant’s stature â€" with its $44 billion market capitalization and rising profile â€" indulge in luxurious offices becoming of a major corporation. But Valeant, led by J. Michael Pearson, its chief executive, and Howard B. Schiller, its chief financial officer, prides itself on cutting costs anywhere it can.

“It’s an expression of their personality,” said Stephen F. Arcano, a lawyer at Skadden, Arps, Slate, Meagher & Flom who has worked with both men for years. “They walk the walk.”

Today, as Valeant pursues its unconventional $45 billion hostile takeover of the Botox maker Allergan with its newfound ally, the activist William A. Ackman, Valeant’s unusual corporate culture and iconoclastic leaders are coming into focus.

Mr. Pearson got to know Valeant in 2007, when he was still at McKinsey & Company, the secretive consulting firm where he had spent 23 years working with health care companies. Valeant was then a struggling California drug maker with less than $1 billion in annual revenue, and Mr. Pearson was brought in to give the company direction.

During his time at McKinsey, Mr. Pearson had peeked under the hood of most every pharmaceutical company, learning what worked and what didn’t.

“He saw where companies were locked in, and where they were missing,” said Chris Coughlin, the former chief financial officer of Pharmacia, which had hired Mr. Pearson. “That gave him an opportunity to quickly get a leg up.”

As a consultant to Valeant, Mr. Pearson told the board they were hopelessly misguided â€" investing too much in research and development, and competing in crowded markets where they would never win.

Mr. Pearson is known for his blunt assessments. “Mike was a very unusual consultant,” Mr. Coughlin said. “He’s very direct and not the kind who tells you what you want you hear. He can be an intimidating character.”

Nor is he a sleek dresser or smooth operator. Onstage with Mr. Ackman on Tuesday to discuss the Allergan bid, the two men were a study in contrasts. Mr. Ackman, lithe and energetic in a crisp suit, sat near Mr. Pearson, slouching in a baggy jacket.

“He’s not this polished consultant,” Mr. Coughlin said. “He sort of has this gruff exterior and this cost-cutter image.”

But after a few months of consulting, Mr. Pearson had the Valeant board’s attention. He was brought in as chief executive in 2008 and given free rein.

His first order of business was slimming down the company, slashing its research budget, selling emerging market businesses where competition was stiff, and refocusing on cosmetic and dermatologic treatments, lucrative areas that the big drug makers mostly ignored.

He then moved to lower Valeant’s tax rate. By merging with Biovail, a Canadian company, in 2010, Mr. Pearson nearly doubled the size of the company. He also, critically, secured a single-digit tax rate thanks to Canada’s lower taxation of corporations.

The Biovail corporate entity endured, but the company changed its name to Valeant. And though Valeant has its headquarters outside Montreal, Mr. Pearson and his team work out of the former Y.M.C.A. near his home in suburban Madison, N.J.

Another major move was hiring a chief financial officer who could serve as Valeant’s in-house investment banker.

In 2011, Mr. Schiller had just left Goldman Sachs, where he was most recently chief operating officer of the investment bank, and before that a deals specialist. Before he made his next move, Mr. Schiller got a call from Mr. Coughlin, whom he had advised on the $60 billion sale of Pharmacia to Pfizer in 2002.

Mr. Coughlin knew that Mr. Pearson was looking for a partner, and thought Mr. Schiller would be the right fit. The men met, and soon Mr. Schiller had joined Valeant. “If you know Mike, you’ll know there is no such thing as a long courtship,” Mr. Schiller said in an interview on Wednesday.

Buying Biovail was just the beginning of a relentless acquisitions spree. Since Mr. Pearson took over, Valeant has spent more than $19 billion buying more than 100 companies. Most have been small, giving Valeant a stable of products it can sell through its expanding distribution and marketing operation.

Since Mr. Schiller joined, Valeant’s appetite for deals has only grown. In 2012, it acquired Medicis for $2.6 billion, and last year it acquired Bausch & Lomb for $8.7 billion.

But in assessing targets, the Valeant executives eschew conventional Wall Street wisdom.

“Most companies are just trying to do what they teach you in business school with deals, which is just earn a slight premium above the cost of capital,” Mr. Pearson said in an interview. “We dismiss that notion at Valeant. We’re only going to do deals that create disproportionate value for our shareholders.”

Tactically, Mr. Pearson said the corporate largess and lethargy he witnessed as a consultant left him impatient with the plodding pace of most corporations.

“Most companies waste a lot of time waiting for a deal, as opposed to doing deals quickly,” he said.

Companies are too worried about making a mistake, he said, and spend too much time fretting over small parts of a business that ultimately aren’t going to make an impact. The lawyers hired to conduct due diligence, though, earn high hourly rates to be completely thorough.

The same is true after a deal, as many businesses labor to blend corporate cultures, rather than making tough choices quickly. “Some of the most lucrative business for McKinsey was doing integrations that took a year,” he said.

At Valeant, Mr. Pearson has tried to avoid these pitfalls. Valeant does not use investment bankers to find deals, though it has turned to Barclays and RBC to finance its bid for Allergan.

And the company is known to conduct due diligence on a target in a matter of days, and bring acquired companies into the fold with similar speed.

“The speed of integrations that we do is what matters,” Mr. Pearson said. “We move very quickly and make decisions on people right away.”

He said his biggest mistake had been not firing people as fast as he should have. “Sometimes you don’t make the people decisions quickly enough,” he said.

Another of Mr. Pearson’s pet peeves is waiting too long to pull the trigger.

One of his clients at McKinsey considered buying the same company for eight years before finally going ahead with it. What would have initially been a $100 million purchase ultimately cost the client $1.2 billion. And while the deal worked out in the end, Mr. Pearson said it was a missed opportunity.

Since Mr. Pearson took over, Valeant’s stock has soared more than 850 percent, to $133 a share from about $14, with most of that growth coming during Mr. Schiller’s tenure.

But Valeant’s trajectory could be hard to sustain. As Valeant expands through acquisitions, it will need to find ever-larger targets to fuel its growth.

That is one reason Valeant is now pursuing its largest deal yet, in Allergan. Combining the companies would help Mr. Pearson achieve his goal of making Valeant one of the five largest drug companies in the world within three years.

But the deal for Allergan is no sure thing. Allergan adopted a poison pill to prevent Mr. Ackman from accumulating more shares, and hired Goldman Sachs to defend itself, pitting Mr. Schiller against his former colleagues.

Even if the deal for Allergan does not succeed, Mr. Pearson’s strategy has already made him extremely wealthy. He owns or has the rights to $1.4 billion in Valeant stock. Mr. Schiller owns or has rights to a more modest $50 million in stock.

Yet the Valeant culture remains a frugal one. All employees have a $50 limit on dinner expenses.

And the Valeant board holds its meetings at Courtyard Marriott or Sheraton hotels at airports, rather than at exclusive resorts.

Mr. Pearson gets there in style, however. He, and at times his family, travel on the company’s private jet.