Why Valeant Pharmaceuticals Intl Inc (VRX) Actions Have Raised More Doubts?


One of the complaints that insurers and patients charge against the pharmaceutical companies is that they charge higher prices for the drugs. Valeant Pharmaceuticals Intl Inc (NYSE:VRX), which grew through an acquisition spree in the last few years, is the latest firm to get embroiled in the controversy of increasing its drug prices. The pharmaceutical firms have their own defense, like they are spending millions of dollars to develop a drug and what they charge was not a big one. However, neither the insurer nor the patients were convinced with the response. On top of this, there is also a practice that is becoming a controversial one. That is to buy an old and forgotten drug and increase the price of such drugs. Let’s see why Valeant’s actions have raised more doubts now.

Repeatedly Increased A Drug Price

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is accused of boosting a drug price of a rare condition repeatedly by as much as 2,253% in five year’s time. That meant a whopping compound annual growth rate (CAGR) of 88%. The disease was known as Wilson’s disease. A patient who paid $510 in 2010 had to shell out over $12,000 in the year 2014. That ultimately forces patients to switch to a different drug from Syprine. The alternative drug has to be taken three times in a day. It was also a fact that though some patients get enrolled in an insurance plan, they were not able to afford it. The medicine is said to have the potential fatal build-up of copper in vital organs. However, it is reportedly creating pain, leg cramps, and numbness.

Incidentally, Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s significant stock price rise was one of the hot topics on the question of the medicines cost in the United States, which is the biggest market for healthcare. There is also tremendous pressure being applied from different segments like employers, health insurers, and politicians. Obviously, the spurt in drug prices and the resultant outrage among the American citizens has cast their shadow on the stock prices of the whole biotech and pharmaceutical shares. As a result, there was a sell-off in the sector due to the tweet by Hilary Clinton pledging a crack down on price gouging.

81% Of Its Portfolio Witnessed Increase

It is quite understandable that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock was one of the shares to be hit hard in the recent sell-off. The company’s practice has become a major talking point in the big biotech and pharmaceutical firms. That is because it increased the price of 56 drugs in the current year alone. Alternatively, it represented approximately 81% of its portfolio. On top of it, the average price increase was approximately 66%. The steepest to get the price hike was 550% for the drug Zegerid for the treatment of gastrointestinal disorder.

On the other hand, a big pharma company, Pfizer Inc (NYSE:PFE) has resorted to increasing the price of 51 drugs til now in the current year. However, the average price increase was only about 9% with the steepest increase of 15%. That is a wide variation justifying the criticism leveled against Valeant Pharmaceuticals Intl Inc (NYSE:VRX). There were already doubts about the business model adopted by the company and its sustainability, since it has a debt of about $30 billion. The concerns have now increased as to how long the company can rely on price increase to justify growth opportunities. The normal practice adopted by it is to acquire a company and boost the prices while reducing the R&D expenses. Currently, it spends about 3% of its revenue on R&D. On the other hand, its rivals are allocating a budget of 15 – 20%.

Star Performer In The Bourse

Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s Chairman and CEO, Michael Pearson’s tactics have made the stock a star performance since 2010. The stock has appreciated over 500% since 2010. As a result, investors have become wealthier with hedge funds managers like John Paulson, Jeff Ubben, and Bill Ackman endorsing the tactics of Pearson.

However, it has several detractors too with many of them being scientists, as well as executives, since they have lost their jobs on the ground of cost cutting initiatives that were adopted by Pearson periodically. The detractors argue that the pressure on pricing will finally hurt its revenue growth. As a result, it will find it tough to get financing for any more acquisition deals, especially when the interest rates are set to increase.

Defend The Move

Despite some outcry, the company got support from unusual quarters, i.e. hedge fund manager Bill Ackman. He has not only defended the company’s price rise move but also lamented the fact that the company did not get credit for spending a lot of money on research for a drug. Also, several drug makers defend the price rise, as well as high profits, citing that they need funds for research to establish new drugs. They have also pointed out that breakthroughs in the medical segment have become costly.

Ackman said that the need of the hour is better PR management, and he was ready to help Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Pearson conceded to Financial Times recently that the company failed to educate its investors on the business model adopted by it. However, he was not ashamed of the current situation. While stating that price rise was the growth driver in the past, Pearson said that the future growth would be driven by sales volume as the business was at an inflection point.

Conclusion

The biggest issue that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) faces is its image. The company needs to do something on an image makeover. Its CEO’s admission of the fact that its business model was not understood by its own investors is a testimony to increasing doubts about its actions. If it needs to involve itself in more acquisition, then it should set right its image before embarking on it.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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