FROM $90 BILLION TO $25 BILLION

Valeant’s back-foot problem flares up in Congress

By Robert Cyran

Valeant Pharmaceuticals’ back-foot problem has flared up in Congress. The drug company keeps fighting through chronic skepticism about its acquisitive ways and the related borrowing. Now, U.S. lawmakers have raised questions about pricing that cost Valeant $11.3 billion in market value on Monday. Always being on the defensive could eventually take its toll.

The $57 billion company’s business model is aggressive. It buys unwanted drugs and developers, and slashes costs. Because Valeant spends so little on R&D, it is heavily dependent on M&A and how much it charges for growth. For example, after Valeant bought two heart drugs from a private company earlier this year, it raised the price of one by more than 200 percent and the other 500 percent.

These sorts of increases have attracted the attention and ire of politicians. Democratic presidential contender Hillary Clinton sparked a debate last week that hit biotech valuations and prompted rollbacks on some rare-drug prices. Democrats on a House committee want to subpoena Valeant and its chief executive, Michael Pearson, over prices. Although the Republicans in charge could ignore the request, it was enough to send Valeant’s shares tumbling by 17 percent.

Although the odds are low that lawmakers would allow the government to use its heft to negotiate harder terms with the industry or impose price caps, Valeant may decide to be more conservative with its pricing anyway. The effect on its profit is unclear, but Pearson was quick to reject the “bear thesis” in a letter to employees. He said the company is “well positioned for strong organic growth, even assuming little to no price increases.” Pearson also noted that Valeant expects to generate 30 percent of its sales overseas in 2016 and that in businesses such as contact lenses price increases tend to be small.

Though Valeant’s shares have swelled by 500 percent over the last five years despite concerns about the acquisitive strategy, Pearson has more convincing to do over the price scare. Valeant already has accumulated about $30 billion in debt, or five times what analysts are forecasting for EBITDA. Combined with a weaker stock, deals may be harder to strike. If Valeant can’t raise prices or buy big rivals, the company could find itself reeling.

Published on Sept. 28, 2015

(Image: REUTERS/Mike Blake)

Valeant’s platform trembles beneath Ackman’s feet

By Robert Cyran

Valeant Pharmaceuticals’ platform is shaking beneath Bill Ackman’s feet. The hedge fund manager’s Pershing Square Capital bought a 5.5 percent stake because Valeant offered a cure for poor capital allocation by drugmakers. Now the company is facing the limits of its business plan. It is scaling back on acquisitions, investing more on research and limiting price increases on its drugs. Outsiders missed the political logic of pharma’s spending.

Valeant, which has a market value of $59 billion, has been a voracious acquirer. Chief Executive Mike Pearson diagnosed the difficulty of big companies in efficiently discovering drugs, and so Valeant slashed research and development spending at acquired firms and spent little itself. And it seasoned resulting profits by raising prices for many of its drugs.

Ackman and Valeant were correct that much of pharma R&D spending is wasted, but they missed the bigger picture. Drug company values are built upon patents and heavily regulated markets. These are creations of society. The discovery of cures to diseases shores up goodwill, and gives politicians and the courts virtuous reasons to support the industry.

Companies like Valeant have chipped away at this goodwill. Democratic presidential front-runner Hillary Clinton said last month that she had her sights on companies that jacked drug prices but spent little on R&D. Republican presidential candidate Senator Marco Rubio slammed drug companies for “pure profiteering” in raising drug prices in a speech Monday. Formerly anathematic measures such as allowing the government to use its negotiating heft to procure drugs on the cheap for Medicare could soon be on the table and attract bipartisan support.
Valeant has felt the wind shift. It will limit realized price hikes on its drugs to less than 10 percent next year. The company is mulling disposing of its “neurology and other” business, which is more reliant on price inflation. R&D spending may double next year, to $500 million.

That would mean Valeant spends about 4 percent of sales on drug development. Peers like Merck spend four times as much proportionally. Investors worry this may not be enough to escape Washington’s ire. The stock is off about 40 percent from its high this summer. That has forced the company to admit that using its shares to acquire rivals is now out of the question. Valeant’s platform looks shakier by the day.

Published on Oct. 19, 2015

Valeant sets tone for post-M&A accounting scrutiny

By Robert Cyran

Valeant Pharmaceuticals sets the tone for intensifying accounting scrutiny once merger activity slows. The drugmaker’s stock ended Wednesday down 19 percent after a short-seller and others questioned its bookkeeping and relationships with other companies. The $40 billion serial acquirer’s history may make it an obvious target, but as growth and mergers slow a renewed investor focus on companies’ figures is a logical shift.

Valeant has bought several dozen firms since 2008. The company’s stock rose more than 20-fold after Chief Executive Michael Pearson took the helm that year to a peak this past summer as deal after deal transfixed Wall Street. Since then, though, the shares have tumbled by more than half. Democratic presidential frontrunner Hillary Clinton’s stance against drug companies that raise prices but do little research and development put Valeant’s business model in the spotlight. During its latest earnings call, the company said that it would undertake fewer acquisitions, limit price increases and invest more in R&D.

Investors are now examining much more closely the stalled Valeant deal machine. There are discrepancies, for instance, in statements from the various parties about how the company is connected to two specialty pharmacies which help dispense drugs and assist patients with payments – Philidor Rx Services and R&O Pharmacy. To make it more convoluted, R&O is suing Valeant. The confusion has sparked questions about Valeant’s bookkeeping for drug sales through pharmacies like these. Valeant has categorically denied any improper accounting.

American healthcare reimbursement is complex, opaque and sometimes prone to fraud. There could be an element of confusion over similar company names. Or it may just be that Valeant’s multiple deals have created a web in which one strand has little idea what another is doing. When chief executives like Pearson do a dozen deals a year, they may spend too little time getting their new charges to work together.

Either way, the Valeant turbulence is a sign of a cyclical change in investor thinking. When growth through acquisitions dries up, there’s greater focus on the reality of sales and profit. Watchdogs, too, have shifted their attention from insider trading to accounting issues. The Securities and Exchange Commission’s newish audit task force, for example, is using special software to spot unusual numbers, dodgy off-balance sheet transactions and auditor changes. As the recent surge of M&A dies down, both investors and regulators may find they have their number-crunching hands full.

Published on Oct. 22, 2015