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)