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CNBC Exclusive: CNBC Transcript: CNBC's David Faber Speaks with Valeant Pharmaceuticals Chairman & CEO J. Michael Pearson Today

WHEN: TODAY, MONDAY, FEBRUARY 23RD

WHERE: CNBC'S "SQUAWK ON THE STREET"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Valeant Pharmaceuticals Chairman & CEO J. Michael Pearson today, Monday, February 23rd on CNBC's "Squawk on the Street." Following are links to the video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000356688 and http://video.cnbc.com/gallery/?video=3000356706.

All references must be sourced to CNBC.

FABER: WELCOME BACK. IT IS THE DEAL OF THE DAY, IF NOT ONE OF THE BIGGEST DEALS OF THE YEAR. VALEANT AGREEING TO BUY SALIX PHARMACEUTICALS FOR $158 DOLLARS A SHARE IN CASH ABOUT $10.1 BILLION, $14 BILLION OVERALL WHEN YOU THROW IN DEBT. VALEANT'S CHAIRMAN AND CEO MICHAEL PEARSON JOINS US NOW. THANKS FOR COMING DOWN TO THE EXCHANGE. APPRECIATE IT.

PEARSON: DELIGHTED.

FABER: YOUR SHAREHOLDERS ARE RESPONDING ENTHUSIASTICALLY, I THINK. IT'S NOT AN OVERSTATEMENT TO SAY, WITH THE STOCK UP AS MUCH AS 15% THIS MORNING TO THE DEAL. BUT MICHAEL IT IS FUNNY I SPOKE TO SOME OF YOUR INVESTORS WHO TELL ME NOT THAT LONG AGO WHEN TALKING TO YOU ABOUT THE PROSPECT OF A SALIX DEAL, GIVEN THE INVENTORY ISSUES OF THE COMPANY, YOU SORT OF SAID, I WOULD STAY AWAY FROM THAT COMPANY. WHAT CHANGED?

PEARSON: PEOPLE ARE ALWAYS ASKING, ARE YOU INTERESTED IN THIS COMPANY OR THAT COMPANY? YOU KNOW, WE NEVER COME OUT PUBLICLY AND SAY WE'RE INTERESTED IN A COMPANY UNTIL WE ACTUALLY ANNOUNCE A DEAL. SO I THINK THAT WHAT HAS – THE GI SPACE IS QUITE ATTRACTIVE. THESE GUYS ARE CLEARLY THE MARKET LEADERS. THE ACTUAL BUSINESS IS PERFORMING VERY WELL. IF YOU LOOK AT THE SCRIPT TRENDS AND HOW THE PRODUCTS ARE GROWING. WE'VE GOT FULL VISIBILITY INTO THE INVENTORY ISSUE WHEN WE DID DUE DILIGENCE.

FABER: YOU FEEL LIKE YOU FULLY UNDERSTAND IT. WE'VE CHARACTERIZED IT AS AN INVENTORY ISSUE. BUT IT COULD EASILY BE THERE'S A LITTLE BIT OF ACCOUNTING FRAUD HERE. THAT COULD BE A SCARY STATEMENT. WHY ARE YOU COMFORTABLE?

PEARSON: WELL, WE HAD A LOT OF DUE DILIGENCE IN THERE. THEY'VE ACTUALLY DONE THEIR RESTATEMENTS, SO THE ACCOUNTING ISSUES ARE BEHIND THEM. THE INVENTORY LEVELS, WE HAVE ALMOST PERFECT INFORMATION. WE WENT TO THE DISTRIBUTORS, AND WE KNOW EXACTLY BY SKEW. AND BY DISTRIBUTOR HOW MUCH INVENTORY THEY HAVE IN THE CHANNEL.

FABER: YOU'RE GOING TO BE WORKING THAT INVENTORY OFF WHEN?

PEARSON: THIS YEAR. BY THE END OF THIS YEAR, WE'LL BE DOWN TO NORMAL LEVELS. IT WILL COST US ABOUT $500 MILLION IN LOST SALES A LITTLE BIT MORE, BUT GOING INTO 2016 ALL THE INVENTORIES WILL BE DOWN TO NORMAL LEVELS.

FABER: ONE REASON YOU SAY THE CASH FLOWS MAY NOT APPROXIMATE WHAT THEY OTHERWISE COULD, GIVING YOU A LEVERAGE RATIO I THINK SOMEWHERE AROUND 5.7 TIMES. THAT'S PRETTY HIGH. WHY ARE YOU COMFORTABLE WITH IT?

PEARSON: IT'S 5.6. WE ARE GOING TO DELEVER IN 2016 BY THE END OF '16, WE'LL BE WELL BELOW FOUR. SOMEWHERE TO B&L. SO NO ISSUES AT ALL IN TERMS OF WE'RE GOING TO BE GENERATING 7.5 BILLION OF EBITA IN 2016 SO OUR LEVERAGE WILL DROP QUICKLY.

FABER: I KNOW YOU WERE ASKED THIS ON A CALL, BUT WHY NOT CONSIDER DOING AN EQUITY OFFERING IN PART TO HELP PAY FOR THIS ALL CASH DEAL, WHERE YOU'RE OBVIOUSLY BORROWING A GOOD DEAL ALL OF IT TO PAY FOR IT?

PEARSON: ONE OF THE REASONS WE WENT ALL CASH WAS THAT WAS ONE OF THE THINGS THAT SALIX REALLY WANTED. IT ALLOWED US TO MOVE QUICKLY. SECURE THE BUSINESS. WE CAN ALWAYS DO AN EQUITY OFFERING LATER IF WE CHOOSE TO. BUT WE REALLY -- OUR EQUITY IS THERE FOR OUR INVESTORS. AND WE DON'T WANT TO DILUTE OUR INVESTORS. AND WHATEVER RETURNS WE EARN OFF OF THIS WE WANT THAT TO GO TO OUR INVESTORS. AND WE'RE NOT A COMPANY THAT LIKES TO ISSUE EQUITY.

FABER: NO I KNOW THAT. THOUGH YOU DIDN'T RULE IT OUT. YOU JUST SAID YOU MIGHT CONSIDER IT?

PEARSON: WE ALWAYS CONSIDER THINGS. IT'S NOT LIKELY.

FABER: BACK TO THE INVENTORY ISSUE, TO WRAP THAT UP. THERE IS AT LEAST SOME CONCERN PERHAPS THAT THE S.E.C. MIGHT COME FORWARD WITHSOMETHING. THAT THERE MIGHT BE SOME RESIDUE FROM THAT. IS THAT A CONCERN FOR YOU?

PEARSON: WELL, IT IS A CONCERN. IT'S SOMETHING THAT MAY HAPPEN. AND WE HAVE EVALUATED THAT AS WELL. AND WE HAVE BUILT INTO OUR DEAL MODEL POTENTIAL DOWNSIDES BECAUSE OF THAT.

FABER: YOU CAME OUT OF THE ALLERGEN FIGHT A LOSER. AND YOU SAID, YOU KNOW WHAT, WE'RE GOING TO SHOW EVERYBODY ORGANIC GROWTH AND WHAT WE CAN DO AND THE STOCK RESPONDED EXTREMELY WELL SINCE THEN, AND YOU PUT UP NUMBERS TODAY THAT SHOW THAT ORGANIC GROWTH. BUT THERE ARE THOSE WHO WILL SAY YEAH, THEY DID IT FOR A LITTLE BIT. BUT ULTIMATELY, THIS COMPANY IS ONLY BUILT TO ACQUIRE. THAT'S THE WAY IT GOES. AND PEARSON HAD TO DO ANOTHER DEAL AND HERE WE ARE AGAIN. WHAT DO YOU SAY TO THEM?

PEARSON: TWO THINGS. FIRST, I DON'T THINK WE'RE A LOSER. I THINK WE WERE DISCIPLINED. WHAT WE CHOSE NOT TO DO IS OVERPAY FOR AN ASSET, BECAUSE ONCE YOU DO THAT, THEN YOUR SHAREHOLDER RETURNS. SO WE WERE DISAPPOINTED AND WILLING TO WALK AWAY AND WE WILL BE IN THE FUTURE ON OTHER DEALS. IN TERMS OF BEING ABLE TO SEE THE PERFORMANCE OF OUR BASE BUSINESS, WE'RE GOING TO SEPARATE BOTH DENDREON WHICH WAS A SMALLER ACQUISITION AND SALIX . IT'S DIFFERENT BUSINESS UNITS. SO YOU'LL BE ABLE TO CONTINUE TO TRACK OUR BASE BUSINESS. SO EVEN THOUGH WE BOUGHT ANOTHER COMPANY, FOR THE NEXT -- WELL, GOING FORWARD, YOU'RE GOING TO SEE OUR BASE BUSINESS AND YOU'LL SEE MULTIPLE, MULTIPLE QUARTERS AND YEARS OF WHAT WE CAN DO WITH THOSE.

FABER: SO YOU DON'T NEED TO DO DEALS TO CONTINUE TO HAVE THE GROWTH THAT YOU'VE HAD.

PEARSON: WE ABSOLUTELY DON'T.

FABER: WHY DO YOU DO THEM?

PEARSON: BECAUSE THEY CREATE EVEN MORE VALUE FOR SHAREHOLDERS AND THAT'S MY JOB. IT'S OUR BOARD'S JOB, TO DO WHATEVER WE CAN TO CREATE VALUE FOR SHAREHOLDERS.

FABER: YOU TALK ABOUT ORGANIC GROWTH AND I LOOKED THROUGH YOUR SLIDE PRESENTATION THIS MORNING. A NUMBER OF THE DRUGS THAT YOU ACQUIRED, FOR EXAMPLE WHEN YOU BOUGHT BAUSCH & LOMB , ARE SHOWING TOP LINE GROWTH OR SAME STORE SALES AS YOU LIKE TO SAY, THAT THEY HAVEN'T SEEN IN YEARS. I UNDERSTAND YOUR COMPANY CUTS R&D AND WHY MARGINS MIGHT BE BETTER. BUT WHAT ARE YOU DOING DIFFERENTLY THAT THESE OTHER COMPANIES WEREN'T IN TERMS OF JUST SELLING THIS STUFF?

PEARSON: I CAN'T SPEAK TO WHAT THEY WERE DOING, BUT WHAT WE HAVE IS A GREAT GROUP OF PEOPLE. WE'RE DECENTRALIZED, SO FOR EXAMPLE, WE HAVE SOMEONE IN CHARGE OF OUR DERMATOLOGY BUSINESS, DEB SHOREN. SHE'S A TERRIFIC MARKETER AND CAME UP WITH THE JUBLIA AD CAMPAIGN AND IS REALLY FOCUSED ON THAT BUSINESS. WE HAVE SOMEONE ELSE FOCUSING ON OUR CONTACT LENS BUSINESS, MARK McKENNA. HE AND HIS TEAM ARE -- I THINK THIS DECENTRALIZED APPROACH OF HAVING ENTREPRENEURIAL FOCUSED HARD WORKING PEOPLE THAT ARE VERY BRIGHT AND CREATIVE, DRIVING EACH OF THESE BUSINESSES, AND NOT A CENTRALIZED APPROACH REALLY UNLEASHES ENERGY.

FABER: AND YOU'VE OBVIOUSLY FOLLOWED A SOMEWHAT ICONOCLASTIC PATH IN TERMS OF THE WAY YOU'VE MANAGED THIS COMPANY. WE'VE DISCUSSED IT IN THE PAST. YOUR APPROACH TO R&D WHICH YOU THINK AT BIG PHARMA IS SIMPLY SPENT WILLY NILLY AND NOT IN A REALLY FOCUSED WAY. ARE MORE PEOPLE GOING TO APPROACH THIS THE WAY YOU DO?

PEARSON: WHO KNOWS?

FABER: ARE YOU SURPRISED THEY HAVEN'T?

PEARSON: WELL, WHAT WE REALLY DO BELIEVE IN INNOVATION. I'VE DONE A POOR JOB COMMUNICATING THAT. I THINK YOU CAN SEE LAST YEAR WE LAUNCHED 20 PRODUCTS. THIS YEAR WE'LL LAUNCH ANOTHER TEN. WE BELIEVE IN INNOVATION, BUT INNOVATION DOES NOT EQUATE TO LARGE R&D SPEND. IT EQUATES TO SMART R&D SPEND AND OFTEN SMART R&D SPEND IS A LOT LESS EXPENSIVE THAN WHAT IS TRADITIONALLY DONE IN THIS INDUSTRY.

FABER: BUT YOU'RE NEVER GOING TO STOP DOING DEALS EITHER ARE YOU?

PEARSON: PROBABLY NOT LIFE WILL GET BORING.

FABER: LIFE WILL GET BORING. YOU'RE VERY AGGRESSIVE. IS THIS COMPANY GOING BE AS BIG AS PFIZER ONE DAY?

PEARSON: I'M NOT GOING MAKE ANY PREDICTIONS. WE'LL CONTINUE TO DO WHAT IS RIGHT FOR SHAREHOLDERS AND CONTNUE TO FOCUS ON CREATING VALUE FOR THEM AND INEVITABLY WE WILL CONTINUE TO GROW.

FABER: IT'S INTERESTING THAT I NOTED COMPANIES THAT WERE COMPETING FOR SALIX YOURSELF, ENDO, SHIRE, ALL INVERTED. WHEN IT COMES TO M&A, IS THAT THE ONLY WAY YOU CAN GO NOW? IS IT ONLY COMPANIES THAT HAVE THE TAX RATE THAT COMES WITH BEING INVERTED THAT CAN COMPETES FOR OTHER COMPANIES?

PEARSON: I DON'T THINK SO. IN FACT WHEN WE DO OUR DEALS WE MEASURE RETURNS BASED ON STATUATORY TAX RATES. WE ASSUME WE'LL BE TAXED IN THE U.S. TAX RATE IN THE UNITED STATES AND WE CAN STILL EARN A STRONG RETURN. I TOOK THIS JOB FOR THE FIRST TWO AND A HALF YEARS WE WERE NOT INVERTED AND WE CREATE A LOT OF VALUE DOING DEALS. WHAT AN INVERSION DOES OR A LOWER TAX RATE DOES IS ALLOW SHAREHOLDERS TO GET A DISPROPORTIONATE RETURN, YOU CAN CERTAINLY DO M&A WITHOUT AN INVERSION.

FABER: YOU CAN BUT IF YOU ARE ABLE TO GET A DISPROPORTIONATE RETURN VERSUS AN AVERAGE RETURN THAT A POTENTIAL COMPETITOR MIGHT GET IN PERSUING THE SAME PROPERTY YOU ARE GOING TO WIN EVERY TIME IN TERMS OF YOUR ABILITY TO PAY A HIGHER PRICE RIGHT?

PEARSON: NO, BECAUSE WE WILL NOT PAY FOR THE TAX BENEFITS. WE KEEP THOSE FOR OUR SHAREHOLDERS.

FABER: FOR YOURSELF. AND WAS THAT THE PROBLEM WHEN IT CAME TO ALLERGEN? TOO MUCH OF THOSE TAX BENEFITS WERE GOING TO BE DELIVERED TO THEIR SHAREHOLDERS?

PEARSON: WELL THE COMBINATION OF ALL OF THE RETURNS ON THE DEAL. IT WAS JUST GETTING TOO EXPENSIVE AND WE WOULD HAVE TIED UP OUR BALANCE SHEET FOR A NUMBER OF YEARS AND WOULD HAVE EARNED A MARGINAL RETURN FOR OUR SHAREHOLDERS. THAT'S MY JOB NOT TO DO THAT.

FABER: YOU SPENT A LOT OF TIME ON THAT DEAL. DID YOU HAVE REGRETS? DID YOU LEARN ANYTHING WHAT HAPPENED THERE?

PEARSON: I LEARNED A GREAT DEAL. I DO EVERY DAY I GO TO WORK AND I'M SURE YOU DO, TOO. BUT THE GOOD NEWS, OUR BUSINESS IS FINE, AND BASE BUSINESS CONTINUES TO PERFORM EXTREMELY WELL, AND WE ARE STILL ABLE TO GET OUT THERE AND DO DEALS. SO, WE'RE -- WE'LL LEARN FROM EXPERIENCE AND MOVE FROM THERE.

FABER: YOU DID ONE TODAY THAT INVESTORS WERE REACTING VERY POSITIVE TO. IT WAS FRIENDLY THOUGH, WOULD YOU EVER DO A HOSTILE AGAIN?

PEARSON: WE'VE TRIED THREE HOSTILES. WE'VE LOST ALL THREE IN OUR WAY. WE WON ALL THREE BECAUSE WE WERE DISCIPLINED EACH TIME. I'LL NEVER SAY NEVER BUT PROBABLY IT'S NOT HIGHLY LIKELY.

FABER: IT'S A LOT TO ASK. MICHAEL PEARSON, THANK YOU FOR COMING DOWN HERE AND JOINING US.APPRECIATE IT.

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