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Why A Congressional Subpoena To Valeant About Price Gouging On Drugs Should Be Granted

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Why A Congressional Subpoena To Valeant About Price Gouging On Drugs Should Be Granted by Citron Research

Short term price target $130 — Longer Term … worse.

Note: This is part 1 in a multi-part story. While this note 1 discusses moral outrage over Valeant’s twisted strategic assault on the healthcare system, Part 2 will discuss the imminent danger of an over-levered balance sheet and why it will implode sooner than later.

Note: This is not a biotech problem. It is a Valeant problem.

The Real Risk to the US Healthcare System is when Health Care Costs are controlled by Hedge Fund Billionaires

How Pharmaceutical Pricing Runs Amok While U.S. Taxpayers Are Looted

For the last 14 years Citron Research has specialized in stories fighting against the abuse of ordinary investors in the stock market. Of course, we have never been shy to expose the greed of the Wall Street establishment. The story we share today has the farthest-reaching social implications of any that we have ever exposed.

While the whole country is in an uproar about Turing Pharmaceuticals, a one-drug startup pharma company attempting to raise prices on a single AIDS drug, the real issue is a 100-billion monster only Wall Street could love — an extremely leveraged company that set the standard for this type of abuse, while being cheered on by a cadre of Wall Street high-rollers too wealthy to fret over their own personal health care costs, and its posse of hedge fund operators.

The real problem with drug pricing in America is forged in a single word:


Don’t Hate The Player – Hate the Game

In the Twitter-storm furor over Turing’s recent one-drug price gouge attempt, the media has overlooked the reality that Martin Shkreli was created by the system. Shkreli is merely a rogue trying to play the gambit that Valeant has perfected.

This article is not for you hedge fund managers who believe that this quarter’s performance is more important than human decency or long-term viability; this article is for the millions of Americans who together can be strong enough to mandate change. Wall Street will understand in time.

While Citron Research analyzes the future viability of Valeant based on their highly levered portfolio of drugs, the main takeaway of this article is the danger that Valeant’s corporate strategy jeopardizes the entire US pharmaceutical industry, and its status as a leader in the development of drugs for the entire medical system.

Systemic Drug Price Hikes … Because they Can

Lets us start with drug price hikes. Senator Sanders called attention to just two instances: heart drugs Isuprel and Nitropress.

Cleveland Clinic states price hikes for the two Valeant drugs unexpectedly adds $8.6 million, or 7%, to this year’s budget of roughly $122 million for medicines administered at its hospitals …

Pharmaceutical Companies Buy Rivals’ Drugs, Then Jack Up the Prices

(WSJ 4/26/2015)

Sadly, these are but two examples of the whole truth. Citron Research is in the process of compiling a comprehensive dataset detailing drug price increases by Valeant. We will publish our findings on http://www.valeantpricing.com as soon as our research is conclusive. In the meantime here is an example of some of the more egregious increases:



This Chart Cannot Be Ignored


Consistently, the justification for high prices of drugs in the U.S. has been the argument that we need continued R&D to drive innovation — and high drug prices are the only way to pay for such innovation. The argument has substantial merits. However, it should be noted this argument is also highly subject to abuse; Valeant has become the ultimate abuser.

Valeant’s Slash and Burn Strategy for R&D

Valeant CEO Michael Pearson is a former pharmaceutical consultant with McKinsey & Co. (23 years) Correspondingly, Valeant’s strategic plan reads like a consultant’s playbook: cut costs and raise prices. Simple, right?

From a consultant’s perspective, Valeant’s fiscal strategy is logical.

Unfortunately, from a systemic perspective, just about every American is worse off as a result of Valeant’s strategy. Increased drug prices also drives higher health insurance premiums for every policyholder in the entire country, and higher deficits for the Federal Government, which bears Medicare costs. Meanwhile, no one is getting any incremental benefit; Valeant has made little to no effort to improve these products.

Comparative R&D Expense for Major Pharmaceutical Companies


The chart above shows how pitiful the research and development spend is at Valeant. The average pharma spends 17% of revenue on R&D, but Valeant spends only 3%.

An easy defense to this from bulls is the ineffectiveness of R&D. Well that is what separates a “good” pharmaceutical company from one not so good — the ability to innovate. Any asshole can jack up prices and cut spending.

To give an example to this point, look at the story of Allergan, the same company that rebuffed Valeant’s takeover proposal because of their business practices.

“From the $7 billion that Allergan invested in R&D between 1992 and 2013, the company gained $50 billion in sales between 2007 and 2013” — WSJ, June 10, 2014


Valeant has recently started to defend its scant R&D by stating they are more focused on “output” rather than “input”, meaning the results they achieve vs the money they invest. This is an insult to every other pharmaceutical company and to the system that supports Valeant. Do you really think that if you are efficient you can provide the same outputs and spend 90% less on research and development than companies like Johnson and Johnson, Pfizer, Merck or Eli Lilly?

Escalating drug prices with no additional innovation simply drains resources from the system, and providing zero additional benefits. It should be stopped and needs to be stopped; otherwise, such practices simply encourage a crescendo of bad behavior from participants. Eventually, it reduces incentives for companies to invest needed R&D that can actually improve the quality of care through the development of new drugs.

This is where is Gets Scary!

Valeant’s strategy to simply slash and burn R&D has rewarded it with an escalating stock price compared to peers. Does this look like a bio-tech bubble or a Valeant bubble?


As shareholders notice the rising price of Valeant stock, other companies are starting to follow in lockstep. Recently, Endo International, now run by a former Pearson lieutenant, is emulating aspects of the Valeant approach by taking out costs and raising prices, then turning into an aggressive bidder for pharma companies like Salix. Similarly, Mylan has started to “play hardball” as we observe with the Epi-Pen controversy.


Note how extreme Epi-Pen price hikes impact public school district budgets for schools only trying to do the right thing by protecting students from life-threatening anaphylactic shock incidents.

The risk that Citron is discussing now was articulated in 2013 article in Forbes comparing Valeant to Genentech. Genentech CEO Art Levinson is a scientist dedicated to research and development versus the consultant in Pearson. This Forbes piece was a chilling foreshadowing of the future.

See full PDF below.

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