How toxic does a drugs boss have to be to get booted out the door?

US Outlook

Michael Pearson has seen Valeant’s share price fall by 83 per cent in five months (Bloomberg)

For a company that just eight months ago was the darling of the hedge fund world, the train wreck that Valeant Pharmaceuticals has become is something to behold. This column first wrote about the Canadian drugmaker (more accurately, drug trader) in October 2015 when its stock was still trading at a lofty $177 (£122). By Thursday this week it was hovering just north of $30 a share. Its demise has been as brutal and swift as any corporate implosion since Enron.

In Wall Street terms the company has also committed an unforgivable crime – it has made analysts and hedge fund titans look like idiots. The buck stops with Valeant’s chief executive Michael Pearson – once a Master of the Universe, now a hapless and friendless shadow of his former self – and if the board has an ounce of sense left, it must fire him immediately.

While it is easy to feel sympathy for the thousands of workers affected by Valeant’s reckless abandon, none of whom are responsible, there can be no sympathy for Mr Pearson.

The truth has long been out there for anyone willing to look. Rival Allergan, which Valeant attempted to buy for $45bn in 2014, rejected the offer in part because its board felt that Valeant’s business model – aggressively leveraging its balance sheet to buy rivals, and then raising drug prices – was “not sustainable”. That appears to be putting it mildly.

The lesson, one that will probably never be learnt by investors, is that if it sounds too good to be true then it probably is. Valeant did more than just borrow and buy with unsustainable speed – it continually pushed the pricing envelope, always at the expense of sick Americans. When pressed on his business tactics in a May 2014 interview, Mr Pearson said: “In terms of running our business, we can do whatever we want to do.” Not quite famous last words, but not far off.

In the past week alone, Valeant has issued a shock profit warning that sent its stock crashing by 40 per cent. Asked during the post-announcement analyst conference call whether or not he would accept the $200m golden parachute his contract awards him in the event of his termination, Mr Pearson said he did not know he had a golden parachute. (The news website Business Insider later described the way in which analysts had questioned Mr Pearson as “the same way you talk to a dog that has just chewed up the furniture”.)

In fairness, Mr Pearson was seriously ill over Christmas. But how does an executive not know he is in line for $200m if he gets fired? When a chief executive is that shell shocked, it’s past time to find a replacement.

Another truth is that if a company is so ethically challenged that it cares not one jot for the people its products supposedly help, then it can be no surprise to find out that its challenges don’t stop there. Valeant is on the verge of defaulting on its debt (its creditors are reported to be mulling changes to repayment terms), has had to restate earnings because of its relationship with a suspect sales outlet, Philidor, and has cost investors billions.

Speaking of its investors, Bill Ackman’s Pershing Square hedge fund now has board representation. Scant consolation perhaps – Valeant has cost Pershing around $2bn in losses since last summer, and Mr Ackman’s reputation has taken a severe beating along with it. But it’s easy to forget that Valeant’s shareholders and stakeholders also include a lot of people whose livelihoods are threatened – people who don’t have a golden parachute.

Michael Pearson has done the pharmaceutical industry – which also does some good – a great disservice. Whatever it costs, Valeant needs to be rid of his toxic influence. If this train wreck isn’t enough to get him fired then one has to wonder what on earth he must do to be shown the door.

What users want may not be the big picture at Instagram

Given that Instagram is owned by Facebook, it was probably only a matter of time before it changed the way in which its 400 million users view posts – from chronological order to algorithm-based. So rather than see photos and videos in the order in which they are uploaded, Instagram users will now see them in the order that Instagram thinks they want to see them, whether they want to or not.

Instagram has been a hugely successful business for Facebook since it paid $1bn for the photo-sharing app in 2010. With the benefit of hindsight it was a steal, particularly when compared to the absurd valuations its rivals Twitter and Snapchat have been able to attain without showing the same consistent growth rate. But changing the way its users view their feeds is a fundamental change, and not necessarily one for the better.

When it announced the move this week, Instagram claimed that many of its users “miss on average 70 per cent of their feeds”, without adding any evidence to prove the claim. Most regular Instagram users would refute that, as would most small businesses, many of which are using the service very effectively.

The evidence from Facebook’s change to an algorithmic feed is that big users get more coverage while smaller businesses can see a dramatic fall in the number of potential customers they are able to reach. That might be good for revenue growth but not for user growth.

The cynic might suggest that Instagram is trying to sell the change as being good for its users, whereas the truth is that the change at Instagram is good for its advertisers. Services such as this one have been a success because they put the wishes of their users first.

But there is a strong counter-argument – that taking the wishes of advertisers into account is the reason Instagram is still free.

Despite their apparently maturing business model, businesses like Instagram are still stuck between a rock and a hard place. Maintaining growth depends on at least giving the impression that the people and small firms using the service come first – but the business reality is that they don’t.