Sunday, December 27, 2015


There's a lot of schadenfreude rippling through the healthcare industry these days.  Much of it has to do with the declining fortunes of a pharmaceutical corporation named Valeant.

Here's a quick rundown of what happened with Valeant in 2015, which is turning out to be a no good, awful, very bad year for the company.


Valeant (VRX in stock lingo) was taken over in 2008 by J. Michael Pearson, a New Jersey man who had worked 23 years at the consultancy McKinsey & Company and who had run its pharmaceutical advisory practice.

Pearson's idea was to buy drug companies, strip out their research innards and concentrate on distribution of existing products.  Also -- and more important -- to mark prices as high as possible.  This worked pretty well, increasing revenue from  $757 million in 2008 to $3.55 in 2012.

By 2014, Pearson was a billionaire and Valeant was trying to buy Allergan, a huge pharmaceutical company famed for its research and determined to keep it up.

Allergan fought back.  According to a Business Insider article by Myles Udland, a bright young Jerseyan who hails from my town:
     Allergan argues that its R&D spending doesn't result in a bunch of wasted 
     money. The $7 billion it spent on R&D between 1992 and 2013 resulted in 
     about $50 billion in cumulative sales, the firm said.

     The company also said additional R&D spending will result in $120 billion in 

     additional sales over the next 10 years. 

Allergan managed to escape Valeant's blandishments and was bought by another actual pharma company, Actavis, in a deal that was completed in March. 

By then, though, Valeant's wheels had begun to come off.  The next month, the Wall Street Journal reported on its up-pricing of two drugs, Nitropress and Isuprel, by 525 percent and 212 percent, respectively, the same day it bought the right to market them.  The drugs are used to treat serious conditions -- dilated heart vessels and congestive heart failure. 

All of a sudden Valeant was attracting the attention of camera-hogging national politicians and the general press as well as business and healthcare publications and websites.  

Short sellers -- who bet money that a given company's stock price will go down -- smelled blood and also went after Valeant.  One, Citron Research, released a chart of 30 drugs acquired and then repriced by Valeant;  increases ranged from 135 to 2,288 percent.  

Then the press got onto the VRX business model, discussing how Valeant looked very different from other pharma companies that invested money in, you know, actual pharmaceutical research.  Business Insider published this chart.

Nobody likes high drug prices, but drug development is expensive and there is a certain sense that drug companies that provide helpful new medicines should recoup costs and make a profit for their work.  What outrages people about Valeant is that it develops nothing; its cynical business model is to identify opportunities to bid up prices very substantially and then to do so.

Then questions were raised about Valeant's relationship with pharmacy benefit manager Philidor.  PBMs stand between drug manufacturers and drugstores in the distribution chain.  Initially it was suggested that Philidor (which Valeant had an option to buy) was fraulently reporting sales revenues in concert with Valeant.  Later it was suggested that Philidor was manipulating only internal transfer payments.  In any event, Valeant looked bad again.

Recently Valeant announced some kind of distribution agreement with drug chain Walgreens, which may result in some lower prices for some Valeant products sold by Walgreens pharmacies but does not address the large issues.

Two days ago it was reported that Valeant Chairman-CEO Pearson had been hospitalized with a serious case of pneumonia.  It has been a hard year for him, and it is fair to guess that the company's struggles have taken a toll on his health as well as his pocketbook.  (Also to hope that his treatment requires the use of some of Valeant's premium-priced products at his own cost.)

Valeant's stock price has fluctuated wildly, reflecting the havoc.  It started 2015 at $144, rose to almost $264 in August, dropped below $70 in November and closed around $114 on Christmas Eve.  To the extent the price has increased in the final quarter, it may reflect hopes that the company will be sold soon.

Valeant is not the sort of stock I'd want in my IRA, but since it is mostly owned by institutional investors, you may be a part owner if you have a pension.

Tomorrow we will discuss a few points related to the prices of pharmaceuticals.

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