High-Price Drug Strategy
The headquarters of Valeant
Pharmaceuticals International, a multinational specialty drug
company based in Quebec.
about a reversal of fortune.
recently, investors were positively star-struck by drug companies that
could raise prices indiscriminately, letting their patients struggle
to pay the freight. Lauded for a laserlike focus on shareholder
returns, companies like
Valeant Pharmaceuticals International,
a multinational specialty drug company based in Quebec, received high
marks and even higher valuations from besotted shareholders.
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however, investors are beginning to see the peril in such a business
model. Sure, price jumps may generate earnings and stock gains, but
when the enrichment of a few comes at the cost of many, unwanted
scrutiny often follows.
Hijacked drug prices blasted to the forefront two weeks ago after a
report in The New York Times
told the story of how Martin
Shkreli, the chief executive of the privately held Turing
Pharmaceuticals, bought Daraprim, a 62-year-old infectious disease
drug, and immediately raised its price to $750 from $13.50 a tablet.
firestorm ensued, Mr. Shkreli accurately noted that his was not the
only company to acquire a drug and then send its price into the
spotlight soon fell on Valeant, which generated $8.25 billion in
revenue last year, up 43 percent from 2013. Among its well-known drugs
is Ativan, a treatment for anxiety.
Valeant caught the eye of Congress this year after it increased the
price of two heart medications it had just bought the rights to sell:
Nitropress and Isuprel. Valeant raised the price of Nitropress 212
percent and Isuprel 525 percent.
Democratic members of the House Committee on Oversight and Government
Reform, led by Elijah Cummings, the Maryland Democrat who is its
ranking member, have been investigating rocketing drug prices. This
they asked Valeant to provide
documents about the increases; it declined.
last Monday, 18 Democratic members of the committee asked its chairman
subpoena Valeant for those
unclear whether the subpoena will be issued. But Valeant’s stock slid
16.5 percent on the news. It recovered somewhat later in the week, but
it has lost more than 30 percent since its August high closing price
the stock plummeting, J. Michael Pearson, Valeant’s chief executive,
a letter to reassure employees.
In it, he rejected investor concerns that the company’s strategy
relied on big price increases. He noted that half of the company’s
sales came from domestic and international businesses in which it had
realized small or no net price increases.
Valeant is “committed to focusing on our key stakeholders while
delivering consistently high performance,” its
satisfying customers’ needs for affordable drugs can conflict with
company executives’ desires for a rising stock price. At Valeant,
executive pay is heavily tied to
Little, a spokeswoman for Valeant, responded in a statement that the
company priced its treatments based on many factors, “including
clinical benefits and the value they bring to patients, physicians,
payers and society.” It also has “robust patient assistance programs
to help patients who face financial obstacles,” she said.
argument for high prices on
pharmaceuticals is that the money
goes to research for new cures. But this is not a Valeant strategy.
other multinational pharmaceutical companies spend well into the
double digits as a percentage of sales, Valeant’s 2014 annual report
shows that the company spent $246 million on research and development
— just 3 percent of sales. Another way to think about that: Valeant
paid its five highest-paid executives 1.5 percent of sales, or $123
million, last year.
question of research, Valeant’s spokeswoman said in a statement that
the company “measures its success on output (i.e., results) rather
than input (i.e., spending).”
Valeant’s History of Deal Making
The drug company is known for
growing through acquisitions and cutting costs.
The drug company was created in a merger of Biovail of Canada
and a predecessor company based in Aliso Viejo, Calif.
The biopharmaceutical company
rejected a bid from Valeant
as opportunistic and too low. (2011)
Valeant agreed to buy the dermatological drug company for
about $2.6 billion. (2012)
Merger talks fell through after a number of concerns from the
target company’s directors, including the size of the deal
BAUSCH & LOMB
The eye care company sold itself for about $8.7 billion,
sidestepping an I.P.O. (2013)
The company, maker of Botox, rejected an
unusual hostile bid from
Valeant and a hedge fund. Valeant was
criticized in the
bitter takeover battle
cutting R.&D. (2014)
Faced with the prospect of letting another deal slip through
its fingers, Valeant substantially raised its bid, putting a
quick end to a bidding war. (March 2015)
Two days after winning regulatory approval for the first pill
to aid a woman’s sex drive, the company was acquired.
than developing drugs, though, Valeant acquires them. Since 2010, it
has acquired companies with a total value of at least $36 billion,
mostly in the United States. It is the sixth-largest acquirer,
globally, by deal size.
2010, the predecessor to Valeant, based in California, was acquired by
Biovail, a Canadian company. It relocated to Canada, a jurisdiction
with a lower tax rate; the combined operations were named Valeant.
move to Canada has been highly beneficial to Valeant, as detailed in a
report on the impact of the
United States tax code on corporate activities. Published in July by
the Senate Permanent Subcommittee on Investigations, the report found
that by moving to Canada, Valeant lowered its statutory tax rate to 27
percent from 35 percent.
that barely captures the true scope of Valeant’s ability to escape
taxes. Its actual cash tax rate is far lower, the report found.
Valeant’s effective cash tax rate has fallen substantially, too, to
3.3 percent last year from 5.9 percent in 2010.
rock-bottom tax rate turbocharged the company’s expansion by
acquisition, according to Howard B. Schiller, a Valeant director and
its former chief financial officer. He told Senate investigators,
“There is no question that we would not be in the same place we are in
today if we had a higher tax rate.”
Valeant’s acquisitions have clearly generated wealth for its
shareholders. The same cannot be said for many of the workers at the
companies it acquired.
Senate report details layoffs made by Valeant after three large
acquisitions: Medicis Pharmaceutical in 2012, Bausch & Lomb in 2013
and Salix Pharmaceuticals this year.
Medicis was acquired, it had 790 full-time employees, the report said.
Valeant terminated 750 of them, mostly in the United States.
& Lomb had 4,103 workers when Valeant came calling. It fired 3,000
workers in that acquisition, half domestically.
Salix’s 977 workers, Valeant is planning to jettison 420 of them, all
based in America. The company has also said it will transfer some of
Salix’s contract manufacturing to Canada and Britain from the United
June, Valeant’s full-time American work force was 5,725, the report
said. Its overseas head count was 13,644.
Valeant is by no means the only company whose strategy skews rewards
to executives and shareholders. That’s unfortunately the way the game
is played nowadays.
does it have to be? A company’s earnings are not generated in a
vacuum. They are a byproduct of its practices and principles. If
investors assessed corporate earnings quality through that kind of
lens, they might just help make the world a better place.
I know. But isn’t it even crazier to leave everything up to executives
who manage only to their stock price?
A version of this article appears in print on October 4, 2015, on page
BU1 of the New York edition with the headline: Side Effects of
Hijacking Drug Prices.
© 2015 The
New York Times Company