Valeant Not The Only Drug Firm Feeling Investor Wrath

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Valeant Pharmaceuticals International is not the only pharma firm buying up older drugs and jacking up the price. They are just the biggest and most well-known player in the pharma sector using this business model, and as a November 23rd article in the Wall Street Journal highlights, other public drug makers seen as following a similar playbook are now also seeing their share prices suffer.

Of note, the share price Horizon Pharma and Mallinckrodt, two of the largest firms compared with Valeant, have fallen by almost a quarter in the last 90 days. Smaller player Concordia Healthcare Corp., based in Ontario, Canada, has lost 42% of its market cap over the same period.


Business model brought to light

Valeant, Horizon and the others are a new breed of “vulture” pharmaceutical company that undertakes as little research and development as possible and tries to boost sales growth through debt-fueled acquisitions of older drugs which they can raise prices on, some critics charge. These “vulture pharma” firms share prices have surged over the last few years as investors (possibly) paid less attention to the sustainability of the business models and focused more on the rapid increase in revenue.

Today, some show me the money investors are worried that growth is now likely to be limited by new government price controls, or by pushback from from large pharmacy-benefit managers, which control the drug spending budgets of employers and health insurance companies.


Moreover, some of the aggressive sales strategies used by these firms have also come under fire, for example, working with pharmacies to assist with patients’ reimbursement and copay issues. In fact, several major pharmacy-benefit managers, such as Express Scripts Holding Co., have in recently ended contracts with pharmacies that dispensed high-priced drugs from Valeant or Horizon.

Firms using the Valeant model have spent little in developing new medicines, which limits their ability to grow ex-acquisitions, critics allege.

Citi analyst Liav Abraham describes the current circumstances as a “house of cards,” where worries about the firms’ growth prospects lead their share prices to fall, leading to new worries about their ability to finance more acquisitions with (possibly inflated) stock, leading to further losses in the share price.

“It’s almost a self-fulfilling prophecy and it’s driven by the fact the business model is driven by M&A and getting the most out of the assets you acquire, not necessarily focusing on innovation in the way that biotech and big pharma does,” Abraham points out.

Other analysts take a more up-beat view on the industry and Valeant in particular. RBC Capital noted in a research research report:

Based on the success of the B&L integration and new product introductions, organic growth has reaccelerated after a period of exposure to generics. Note: Management is targeting double-digit growth through 2020 though this is not official guidance.

Salix & Dendreon further diversify company. The B&L deal vaulted Valeant into a leadership position in the eye care market and diversifies the company from a product and regional standpoint. We believe new product launches expected from Salix and B&L should fuel organic growth. The Salix & Dendreon deal expands the portfolio as well, into GI & oncology, and would also contribute to organic growth.

According to the WSJ article, “Horizon and Mallinckrodt disputed comparisons with Valeant and defended their business models. Concordia didn’t respond to requests for comment, but has said its drug prices are competitive with other products on the market. Valeant didn’t respond to requests for comment. In public comments, it has called its business model sound, and said it would focus more on paying down debt.”

And the war of words escalated on Wednesday with John Hempton and Valeant disputing Stephen King novels and chess moves.

Hempton states:

Valeant has responded to my last blog post. To quote:

Short sellers have been making false, unsubstantiated claims about Valeant for months in an attempt to drive down our stock price, and today’s allegations also contain significant inaccuracies. Valeant has already disclosed that 7.2% of our sales this year through the third quarter went through specialty pharmaceutical channels, and that has not changed. As we have said, in October we decided it was appropriate to sever our relationship with Philidor after allegations about their business practices came to light. The entities mentioned today appear to have been formed on or prior to 8/18/2015, based on public records. Furthermore, our board of directors has appointed an ad hoc committee to review allegations related to Valeant’s business relationship with Philidor and related matters

There is no denial the entities were set up either by Valeant or Valeant associates.

They can’t and don’t deny that because it is the truth.

But they deny that they are still setting up or running these pharmacies. I could have fun with that assertion – lists of transactions if they want.

However one will do. A chess named pharmacy from that list (ELO Pharmacy) registered in Illinois on 28 October – after the Philidor expose.

Here is a screen shot.


ValueAct’s Mason Morfit rejoins Valeant board

Mason Morfit, a partner at activist hedge fund ValueAct Capital, rejoined the board of directors of Valeant in late October as the firm tries to defend itself against claims of unethical behavior including accounting impropriety and aggressive conduct when selling prescriptions. Morfit resigned from the Valeant BoD back in May of 2014.

As reported by ValueWalk on June 17th, hedge fund ValueAct made a mind-boggling 2100% return on a big chunk of its Valeant investment that it wisely sold this summer before the current brouhaha developed. At the time, ValueAct still held a 4.4% stake in the specialty pharmaceutical firm. As noted in recent days, Bill Ackman has upped his stake, Nehal Cophra got killed on her investment in Valeant, and wiped out ValueAct’s 2015 return.

ValueWalk also reported yesterday that Pershing Square has had a minor come-back this month. Ackman’s hedge fund was down 24.5% YTD through November 17th, now the fund is down 20.5% through November 24th.


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