PARIS/LONDON (Reuters) - Chris Viehbacher speaks plainly. “We had somewhat of a mess in Brazil,” he told financial analysts in August 2013, “so that’s why I decided to change management.”
Fifteen months later he has gone the same way as the Brazilian employees he sacked so decisively - fired as chief executive of French drugmaker Sanofi (SASY.PA) at a dawn board meeting, with the “mess in Brazil” cited as one of the reasons.
Investors were stunned, having hitherto seen the affable German-Canadian as one of the best in the business, despite some setbacks and a tough few years for the drugs industry worldwide.
The whirlwind week began on Monday Oct. 27 with a leaked letter to the board, dated Sept. 4, in which Viehbacher wrote of rumours of a plot against him at board level and demanded clarity. On Tuesday he presented quarterly results.
“We had a conference call and questions were asked about his position but he was being reassuring,” said Andrea Williams, European fund manager at Royal London Asset Management.
“Then at 8 AM on Wednesday he was gone. There was no opportunity for shareholders to say they did not want him to go.”
In truth, Viehbacher’s downfall was a rather more slow-burn affair. This is the story of how the high-flying former GlaxoSmithKline (GSK.L) executive fell out with members of his board - to a point where they were plotting to replace him, only to find their hand forced by the leaked letter.
Viehbacher declined to be interviewed for this article.
The other main player in the saga is Serge Weinberg, a stalwart of the French business establishment who joined the board after Viehbacher’s 2008 arrival. Weinberg became chairman in 2010, and now has to steer Sanofi until a successor is found.
According to the account Weinberg gave to analysts last week, board patience with the style and the substance of the Viehbacher regime was already wearing thin when the CEO was explaining the Brazilian issue back in August 2013. The problem involved local managers overestimating demand, leading to an inventory build-up that ultimately had to be written off.
“The execution focus was not sufficient,” Weinberg said. “As you probably remember, 2013 was not very satisfying from that point of view.” Attempts to reach Weinberg for further explanation were unsuccessful.
In the same August presentation, Viehbacher delivered a poor set of second quarter results. Sanofi had undershot investor expectations for the second successive quarter and was cutting its forecasts for the full year 2013. The company would go on to miss forecasts again with its third quarter figures in October, warning a second time on annual earnings.
On the matter of style, according to a source familiar with the meetings, Viehbacher was warned last year by at least two board members to be more diplomatic in negotiations over French job cuts that were part of a restructuring of the company’s research and development operations.
His forthright and single-minded style had helped him see through the transformational $20 billion (12.5 billion pounds) takeover of U.S.-based Genzyme in 2011. But it was proving less effective with powerful French unions and a government that was sensitive about unemployment.
“Chris’s management style was not adequate,” Weinberg said on the call with analysts. He stressed that the board’s decision to fire Viehbacher had been unanimous.
By February 2014, though, there was still no sign outside Sanofi of the rumblings of discontent on its board.
Quarterly profits came in above expectations, even though earnings for the full year 2013 were down 9.6 percent.
Investors had hoped for more than the 4 to 7 percent earnings growth promised for this year, but they understood that drugmakers worldwide were struggling with patent expiries and cutbacks in healthcare spending by European governments.
In the search for growth, Sanofi’s focus on diabetes, rare diseases, emerging markets, over-the-counter treatments, animal health and generics seemed to make sense.
But Viehbacher wanted to get more out of Sanofi. He set to looking for ways to upgrade the growth profile of its portfolio by jettisoning older drugs - those that will deliver falling revenue over the coming years.
Many of those products are made in France, with the inevitable implications for French jobs.
According to chairman Weinberg, Viehbacher and the board already knew at this stage about another blow that was to hit the company - a sharp drop in U.S. revenues from its diabetes drug Lantus, which goes off patent in 2015.
Investors did not hear about the issue until Tuesday of last week when a wounded CEO presented third quarter 2014 results, just 24 hours before he was fired.
Perhaps dismissive of the warnings from board members about the sensitivity of French job cuts, or perhaps mindful of them, Viehbacher decided not to tell his board about the review of its portfolio of older drugs. Then it leaked into the press in the summer.
This might have been the tipping point for Weinberg, who cited the issue as an example of Viehbacher’s poor communication with the board, and said he had begun discussions about replacing him around that same time.
Viehbacher told Reuters just before he was fired that the review had never become an actual project, and so there had been no need to share it. One investor said that might have been unwise.
“As CEO, do not try to sell an $8 billion drug portfolio without informing your board, if you want to keep your job!” said Geir Lode, head of Hermes Global Equities.
Weinberg also laid the blame for the Lantus problems at Viehbacher’s feet. “It was clear in the beginning of the year that we had an issue that needed to be fixed”, he said.
“It appears that our sales force management on Lantus in the U.S. could have been better. I don’t want to elaborate more on this but, clearly, we have not been as good as we should have in managing our sales force on this market.”
Another issue that surfaced around the same time as the mature products review was Viehbacher’s move from Paris to Boston, headquarters of Genzyme, and the heart of the biotech industry. At the time, a spokesman cited family reasons.
Sanofi alternates with oil group Total (TOTF.PA) as France’s biggest company by market value, and so the domicile abroad of its CEO made headlines, but only for a few days.
On the phone to analysts last week, Weinberg appeared to have difficulty saying whether it was a problem or not:
“So, of course, the (Boston move) decision was not an issue. We were informed. We didn’t have a discussion on this, we understood the subject, but clearly, from a functional point of view, it has probably made things a little bit more difficult, although it is not a matter that has been counting in the decision that we took.”
But Viehbacher’s relationship with Weinberg was by now bad. “There was a lot of growling,” said a source close to the board.
There remain plenty of unanswered questions, including why Weinberg thought he could hunt for a replacement for Viehbacher without fear he would find out, how the CEO’s bombshell letter stayed secret for almost two months, to what extent performance or personality were the problem, and whether there are other as yet unrevealed issues in the background.
For the moment, it looks like mismanagement all round.
“They all knew there was disagreement, and yet the whole affair was allowed to reach the market with no plan B in place,” said Philippe Soullier, head of management transition consultants Valtus.
And the real test for Sanofi, shorn of its CEO of six years, now lies ahead.
First of all, Weinberg needs to reassure the all-important executive committee - the team of top bosses that reported directly to Viehbacher. Nine out of 11 of them were appointed under Viehbacher. “The team he put in place may well decide to leave,” said Alain Gilbert, co-chairman of medical business strategy consultants Bionest.
And Weinberg must also take the stand in Viehbacher’s place on Nov. 20 to present the company’s R&D day - ironically, being held at the Genzyme headquarters in Cambridge, Massachusetts, near Viehbacher’s new U.S. home.
“The strategic direction of the company is now much more uncertain,” said Hermes’ Lode. “Given the growth challenges faced by the company, especially in the diabetes area, it is now a much harder investment case.”
Additional reporting in Paris by Natalie Huet and Gwenaelle Barzic, and in London by Ben Hirschler and Simon Jessop; Writing by Andrew Callus; editing by Janet McBride