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Zarrella reflects

Rochester Business Journal
August 7, 2009
Ronald Zarrella is emphatic: He has no intention of running a public company again.

It is not for lack of opportunities. The chairman emeritus of Bausch & Lomb Inc., who continues to live in the Rochester area and work with local educational institutions, startups and other non-profits, said he has had plenty of them. But Zarrella, in his first in-depth interview since leaving the global eye-care company, said he is "done" with Sarbanes-Oxley regulations and public stock ownership.

Zarrella retired as chairman and CEO of Bausch & Lomb in March 2008, five months after the company's sale to private equity firm Warburg Pincus LLC was completed.

"We live in a world where there are no long-term shareholders anymore," Zarrella said of his decision to stay away from public companies. "When 70 percent of trades are made by hedge funds, they don't care about the future of these companies.

"They care about making as much money as they can in as short a period of time as they can," he added, "and I don't think you can run a company that way."

Zarrella's views are shaped by nearly 25 years as a top executive at two iconic American public companies. From 1985 to 1994 at Bausch & Lomb, he served in top roles including president of the former International Division and company president and chief operating officer. He left to join General Motors Corp., where he spent seven years, eventually becoming executive vice president and president of General Motors North America-a business with more than 50 times Bausch & Lomb's annual revenue.

At age 52, Zarrella left GM in late 2001 to return to Bausch & Lomb as chairman and CEO. He led the company for six and a half years. The average tenure of a CEO at a public company today, he noted, is three years.

"And you know what? If it gets up to 10, it gets too long; you run out of ideas," Zarrella said. "I was running out of ideas. I was just tired."

Before its sale to Warburg Pincus, Bausch & Lomb was rocked by a series of misfortunes-misconduct at its Brazilian unit, accounting woes in Asia and then the recall of its ReNu with MoistureLoc product in May 2006. The lens care solution was found to have an associative link to fusarium keratitis, a corneal fungal infection.

"When we went through that recall, (that was) tough, real tough," Zarrella recalled. "For five years we built up this terrific group of shareholders who were interested in growth and were willing to wait for the growth, so long as they were convinced that you had a story. And when (the recall) happened, they all went and we ended up with hedge funds owning the company."

Ultimately it was, he added, "probably the right thing to go private at that time."

Difficult decision

The decision nonetheless was not an easy one for Zarrella, and he still has mixed feelings about the buyout, which was announced roughly a year after the recall. He has an obvious, special connection to Bausch & Lomb-its people and products-and he recognizes the role it has played in the community for more than a century and a half.

"After the recall, when you looked at our shareholder base and what they were demanding, and given that we still had to go through cleaning that situation up, cleaning up lawsuits, it was easier to do that as a private company," he said. "As a public company, when your stock is trading at $45 and somebody offers you $65, there isn't a hell of a lot you can do."

Warburg Pincus' $65-a-share offer, which included a provision for the global private equity firm to assume $830 million in Bausch & Lomb debt, was valued at $4.5 billion. The total cash payout to Bausch & Lomb shareholders was some $3.8 billion.

Bausch & Lomb's financial issues combined with the product recall to create a perfect storm, said Gary Phillips M.D., former global pharmaceuticals chief at Bausch & Lomb. He now is global head of portfolio management for Merck Serono S.A. in Geneva, Switzerland.

"The financial problems coinciding with the recall, it was just like the death blow to the company at that point," Phillips recalled. "Our stock dropped from $80-something a share to the low $40s-we dropped in half in terms of valuation-but there was still a lot of value left in the company, and that really set us up as an acquisition target."

Less than two weeks after the agreement with Warburg Pincus was announced on May 16, 2007, it was thrown into doubt when rival Advanced Medical Optics Inc. made a move for Bausch & Lomb, offering $75 a share. On Aug. 1, AMO dropped its bid, with its CEO complaining in a letter to Bausch & Lomb's board that "unrealistic hurdles ... have been uniquely imposed on (our company)." AMO eventually was bought by Abbott Laboratories.

"If we had been bought by AMO, we just believed that the combined company would not be better off," Phillips said. "In fact, it might be worse off. ... (AMO's) stock continued to drop and drop and drop, and then Abbott came in and scooped them up. So I think in the end it was probably right to go private."

Public trading in Bausch & Lomb shares ceased on Oct. 26, 2007, at the New York Stock Exchange's closing bell.

The company, which remains headquartered here, today employs some 1,600 people locally and 12,000 worldwide. Under Chairman and CEO Gerald Ostrov, it recently decided to move manufacturing of two contact lens lines from Waterford, Ireland, to Rochester.

Strong leader

Before the ReNu with MoistureLoc recall, Bausch & Lomb was on the leading edge in the lens care market. The decision to suspend U.S. shipments of the solution triggered a downward spiral of the company's stock, which tumbled to $46 from a 52-week high of nearly $88. The product was permanently removed from worldwide markets in May 2006.

While working to solve the fungal puzzle, Bausch & Lomb took steps to alleviate consumer fears. Press releases flooded the media as the company responded to alerts from the U.S. Food and Drug Administration.

Praveen Tyle, who headed research and development for the company, said those were "24/7 days"; his team and others worked around the clock to solve the problem. The urgency extended beyond the business, said Tyle, whose son was using the solution as well: The focus was on consumers. Corporate planes were at Tyle's disposal as the firm transported patient samples to hasten the investigation process.

"Leadership doesn't show in good times; leadership shows in bad times, and I would say the strongest leadership of Ron probably was in those times," recalled Tyle, who now is senior vice president and global head of research and development, business development and licensing at Novartis Corp.'s Consumer Health unit.

Phillips also noted Zarrella's strength and calm leadership during the challenging times leading up to the buyout.

"Ron is a very caring guy; he's a very passionate, caring person, which is what makes him so charismatic and personable and draws people to him, because he really puts it out there," Phillips said. "And going through the recall and going through the financial crises, I think he felt-he emotionally felt that. He was there as a leader; he never recoiled, he never kind of went and hid."

Though Zarrella calls his experience at Bausch & Lomb "tremendous" and "positive," he acknowledges that is not how he felt through the nights during the recall when he slept with his BlackBerry and awoke to answer the phone every time its red light went off.

Looking back, Zarrella said he is proud of the way the company and its employees handled the crisis. The lens care solution had 30 million users worldwide, he noted, but in the end fewer than 300 official cases of infection were reported to health officials worldwide.

"I think few companies could have taken a blow like that with such a big profit generator and gotten through it, gotten behind it as quickly and come out starting generating earnings and generating cash the next year," Zarrella said.

Building value

Bausch & Lomb's lens care unit was among the businesses that Zarrella scrutinized before taking the reins as CEO.

He returned to Bausch & Lomb in late 2001, after spending seven years at GM. It was the second time he had been approached about the top job by William Waltrip, who stepped in as chairman of Bausch & Lomb a couple of times. Zarrella said Waltrip also traveled to Detroit in the mid-1990s after CEO Daniel Gill had left the company, to gauge Zarrella's interest in the role.

"That was less than two years into the GM job. I said, 'Look Bill, I like Rochester, and I really love Bausch & Lomb, but I've got this place torn apart here,'" Zarrella recalled. "We just kind of eliminated the car divisions, got into global marketing and global sales. ... It would have been irresponsible to leave. And I was really supercharged at GM.

"So that didn't work," Zarrella added. "But he stayed in contact." When Waltrip made a second attempt in 2001, Zarrella was ready to be "CEO somewhere," he said. Many of the people he had worked with closely and mentored during his previous tenure at Bausch & Lomb were in positions of authority, a factor that played into Zarrella's decision. What's more, it was a chance to return to Rochester-and it had not been easy living in Detroit.

"It was one of these things where we had to put a fence around our property and have a controlled gate. GM security was on the property once an hour, touring around. We had periods where they had to take my kids to school," Zarrella said. "Rochester is not like that."

So he took a closer look at Bausch & Lomb.

"I did a sum-of-the-parts analysis (of) the value of the company," he said. "It had all these terrific brands and terrific assets, and there was no value being assigned to them."

Challenges confronted all of Bausch & Lomb's businesses. Analysts were hungry for a turnaround; the company had been falling short of Wall Street's expectations for more than a year. Even the firm's efforts to realign its management team to focus on growth areas had not inspired confidence.

ausch & Lomb's stock was trading around $30, and its hopes were pinned on Retisert, formerly known as Envision TD, a tiny implant that can be inserted into the back of the eye in an outpatient procedure to deliver a consistent drug dose to the diseased area. Zarrella said he quickly realized that Bausch & Lomb could not bank on that alone.

"It was clear that there was an awful lot of value in the core businesses, and if you could bring out the value out of the core businesses and then tack on some growth areas, then you can really build something here," Zarrella said.

Quentin Roach, former Bausch & Lomb vice president of global customer strategy, said he witnessed the changes Zarrella brought to the company, from process discipline and accountability to delivering on expectations.

"He's a very hands-on and focused individual in terms of reviewing and probing decisions to make sure that there's angles and perspectives that get considered," said Roach, who now is senior vice president and chief procurement officer for Bristol-Myers Squibb Co.

Upon his return, Zarrella quickly drafted cost-saving strategies to improve profitability and identified short- and long-term goals for growth. By October 2005, Bausch & Lomb had reported 14 consecutive quarters of positive earnings surprises, and analysts saw the company on a path to extend its winning streak.

"So in a relatively short time, 2002 to 2005, we started to bring out the value in those core businesses, had a bunch of new products that were working and had put together a pharmaceutical infrastructure that I thought was really going to be the driver of growth for the future," Zarrella said.

He added: "You have to be committed to it for the long term. I was. And I think there has to be a balance between short-term R&D and long-term R&D, particularly in health care."

Zarrella wanted to expand the company's ophthalmic pharmaceuticals portfolio; he believed that prescription drugs would result in big payoffs down the road.

Bausch & Lomb's solid vision care business-including the high-margin lens care unit, where the company had market clout-was expected to fund investments in new endeavors. In 2005, Bausch & Lomb said it would invest $35 million and add 200 jobs over the next two years as it nearly doubled the size of its North Goodman Street research and development center.

Phillips took charge of the pharmaceuticals segment, which saw double-digit growth and soon was recognized by analysts as a possible growth engine for the company. Phillips said his task was to build the division's capabilities, diversify the risk in the portfolio by building a broader product line and ensure that the company would not waste investors' dollars.

"I always characterized it as my dream job, and it really was," he said. "It was a great opportunity to take. I think it was the right strategic move (to invest in the pharmaceuticals business)."

Part of Zarrella's strategy at Bausch & Lomb was luring top talent from competitors and other companies. For many in the senior management team who relocated to Rochester, he played an important role in the decision to join Bausch & Lomb.

"(Zarrella) was sort of the driving force," Tyle said of his own move from Canada's Biovail Corp. to Bausch & Lomb, "because his vision really was to grow the business not only in innovation on the vision care and surgical side, but he wanted to basically grow the branded prescription side, focusing on blinding diseases."

By 2006 the pieces were in place.

"I thought we'd put (together) the foundation for the company that was really sustainable going forward," Zarrella said.

Then the ReNu with MoistureLoc debacle engulfed the company.

"The recall was a real kick in the teeth and derailed the momentum," Zarrella said.

After B&L

Since Zarrella exited the corporate arena in March 2008, his calendar has remained full. Among his current roles, he is chairman of the University of Rochester Medical Center.

Mark Taubman M.D., acting CEO of URMC, said Zarrella's industry experience offers the medical center a fresh perspective on financial issues, efficiencies and approaches to management as the medical center develops plans and tackles initiatives such as the upgrade of its information system to electronic medical records. And, Taubman noted, Zarrella has become a "champion" of quality, making it a top priority for the board.

"(Quality of outcomes is) good at the U of R; there's no reason they shouldn't be in the top 5 percent in the country," Zarrella said. "And they've got the capability to do that, and a lot of the quality process you learn in industry, particularly all those years at GM trying to catch Toyota, are applicable to the medical center."

At Rochester Institute of Technology, Zarrella holds a board seat and chairs the committee on trustees, which works to enhance RIT's reputation by attracting trustees who are well-known nationally.

"I've been on four university boards (in) one way or the other," Zarrella said. "RIT is about as unique a place as there is. When you take the combination of the technical capability and what was Al Simone's and now ... Bill Destler's vision of linking all the creative talents and all the creative capabilities that are there with the technical side of the university, it can be something very, very different."

An RIT spinoff, Liban Inc., has caught Zarrella's eye. He plans to invest an undisclosed sum in the company, which develops systems for vehicles, monitoring their "state of health," CEO David Chauncey said. He added that as a director Zarrella brings a wealth of experience and background to Liban.

The firm's technology, which is similar to GM's OnStar, an in-vehicle security, communications and diagnostics system, is familiar territory for Zarrella. At GM, the OnStar unit reported to him. It remains a technology he has a deep passion for and a business that he calls an enormous success at GM.

"In fact, if I could've picked what I wanted to happen for me, I wish GM spun out OnStar as a separate company; I'd be the chairman," Zarrella said with a laugh.

His fascination with technology is obvious. Zarrella has been involved with the FIRST organization-For Inspiration and Recognition of Science and Technology-for roughly 15 years, remains a director and loves its robotics competition. He is working with Rochester City School District superintendent Jean-Claude Brizard to establish teams for FIRST robotics to get children in city schools interested in mathematics and science. Zarrella hopes to use Rochester as a base to expand the program to Buffalo, Syracuse and perhaps Corning.

In addition, a solar energy startup in Detroit has drawn Zarrella's interest, and he is on the executive committee of the Committee for Economic Development, non-partisan organization based in Washington, D.C., that does policy research on major economic and social issues.

"Some of the things they're involved with now are absolutely critical to the future direction of the country, and it's an important voice," Zarrella said.

Given his commitments, Zarrella is not living a retired life in the conventional sense. But his relaxed demeanor is plain to see.

"My health is better; my relationship with my family is better," he said. "I'm not spending much time doing fly fishing, which I love to do, or sailing, which I love to do. But I'm having a lot of fun doing what I'm doing, and it's very diverse."

sjacob@rbj.net / 585-546-8303

08/07/09 (C) Rochester Business Journal


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