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Valeant’s New CEO Joe Papa Has a $17 Billion Ultimatum

March 29, 2017, 10:01 AM UTC

Nobody said it would be easy to rescue Valeant Pharmaceuticals—nor cheap.

Valeant paid its new CEO Joe Papa a fat paycheck worth nearly $63 million in 2016, according to the company’s recently disclosed proxy statement. On the surface, Papa seems to have gotten an extraordinarily generous deal to turn around the beleaguered drug company: Not only is his salary more than twice what it was when he was CEO of Perrigo (PRGO), a company nearly three times as valuable as Valeant (VRX), it’s also especially good considering Valeant’s stock price has fallen nearly 67% since he took over.

But there’s a catch. Papa doesn’t actually get to keep the vast majority of that money unless he pulls off a truly heroic feat with Valeant’s stock price, a maneuver so seemingly impossible that the accomplishment would not only make him a darling on Wall Street, but it could put him in the hall of fame of corporate turnaround artists. (Meanwhile, Valeant’s former CEO Michael Pearson, who preceded Papa, is suing the company for withholding $32 million in pay he claims he is owed.)

In fact, in order for Papa to even keep half of his paycheck, he has to nearly quadruple Valeant’s stock price. And if he wants to keep all of his pay, Valeant stock will have to rise 460% from its current level in just a little more than three years. That means Valeant would need to trade at or above $60 a share, putting its market cap at $20.5 billion, or about $17 billion more than it is now.

After witnessing a 95% decline in the pharmaceutical company’s share price amid a series of scandals, Valeant’s board, led by former shareholder and hedge fund manager Bill Ackman, smartly tied Papa’s compensation to a recovery in the stock price. The bulk of Papa’s pay, in the form of performance-based stock grants, is contingent upon Valeant’s share price surpassing certain price hurdles, with $60 as the minimum to receive any of that incentive compensation.

That makes the job for Papa, who was hired away from Perrigo to run Valeant in May 2016, both high-risk and high-reward: While he’ll forfeit tens of millions of dollars if he can’t hit the $60 target, if he somehow manages to take Valeant’s stock to new highs above $270 a share, he stands to make about $800 million over four years—likely more than all of his CEO peers combined.

Of course, getting there looked a lot easier when Papa took the CEO job last April, when Valeant stock was trading around $35 a share. Now, with shares trading at $10.70 on Tuesday, 60 bucks looks much farther away. Here’s how tall an order Papa has: In order to reach $60, Valeant stock would have to double from its current price, then double again, and then rise another 40% on top of that, all in the next three years. That kind of return is not unheard of—a handful of Fortune 500 companies managed to triple or quadruple their stock prices last year alone—but it’s very, very rare.

Indeed, when Papa was hired, he also received stock options valued at $10 million of his 2016 pay. But as Valeant’s share price is now below their exercise price of $23.92, those options are currently “underwater,” or worthless.

Because the performance-based stock grants also aren’t worth anything until Valeant stock hits $60, the current value of Papa’s paycheck last year is much lower, or about $14.7 million. (That includes his salary, a $1 million performance bonus and $8 million signing bonus, and time-based stock grants that are currently valued at $4 million.) The time-based stock award is also a one-time grant meant to last four years, according to Valeant, meaning the annualized value of Papa’s pay was only $11.7 million in 2016.

That’s not even a 2% raise over the $11.5 million Papa made at Perrigo in 2015. And it’s certainly not the kind of promotion a CEO of a public company typically leaves his job for, as Papa did, especially for a crisis situation like Valeant in need of a rescue.

To unlock the real money, Papa really needs to get Valeant’s stock to $60 a share—or ideally higher. Even if Valeant shares trade at $59.99, the most he could make is $74.6 million over four years, or $18.7 million per year, assuming he maxes out his cash bonus. That’s certainly respectable and roughly in line with what pharmaceutical CEOs at Eli Lilly (LLY), Pfizer (PFE) and AbbVie (ABBV) made last year.

As soon as the stock ticks above $60, though, Papa immediately picks up another $15 million. If Valeant hits $150 a share, Papa gets to keep 100% of the allotted performance-based stock awards, making his total pay balloon to about $300 million, or a whopping $75 million per year. At that price, Valeant would have a market cap of more than $51 billion, and Papa would have increased the value of the company by nearly $48 billion.

Then there’s the scenario Papa and Valeant’s shareholders may only dare dream about. Investors who rode Valeant up with Bill Ackman in 2015 before its downward spiral will remember a day in August that summer when the stock reached an all-time high of about $264. The company’s board put a special provision in Papa’s employment agreement that turbocharges his pay the way a videogame might when a player levels up into bonus points mode: If Valeant’s stock price reaches a new high of at least $270 a share in the next three years, Papa gets double the allotment of performance-based stock.

At that price, he would collect $800 million, or $200 million a year over four years—making more than the CEOs of more than a dozen major pharma companies are likely to be paid, combined. Valeant would also have a market value of more than $92 billion, more than that of drug makers including Allergan (AGN) or Gilead (GILD).

Investors aren’t exactly holding their breath for that outcome to materialize. Even Ackman, the Pershing Square hedge fund manager who long defended Valeant and once insisted it could be the next Berkshire Hathaway (BRK-A), lost patience in waiting to make his money back when he sold his last shares in the company earlier this month. But if Papa can pull it off, not only will he be a much, much richer man, but he’ll earn a legendary reputation on Wall Street among Ackman and others who will wish they’d never doubted him in the first place.