The Valeant (NYSE: VRX) Stock Price Is Now Under Attack by Charlie Munger

The Valeant Pharmaceuticals Intl. Inc. (NYSE: VRX) stock price is now under attack from iconic investor Charlie Munger.

The Valeant stock price has plummeted more than 60% since peaking at $263.81 in August. Regulatory inquiries into Valeant's drug pricing practices and its relationship with specialty pharmacy Philidor Rx have sent shares tanking in the last month.

VRX stock priceValeant's crash picked up steam over the last two weeks amid a scathing report from Citron Research. In a report entitled, "Could this be the Pharmaceutical Enron?" the short seller alleged Valeant engaged in a series of sham transactions to inflate its drug sales.

Munger, vice chairman of Berkshire Hathaway Inc. (NYSE: BRK.A) and Warren Buffett's right hand man, voiced concerns about Valeant stock months ago.

Munger's attack on Valeant began in March when he answered a question regarding Valeant at an investor conference.

"CEOs don't criticize themselves or their accountants, so someone had to do it," Munger replied. "They all were awful, and everyone, including investment managers, went along with that. Valeant Pharmaceutical Company is ITT of the modern day, except that the guy is much worse than Harold Geneen (ITT president)."

ITT scooped up more than 350 companies in 80 countries during its years as a spry conglomerate. Its holdings included Sheraton Hotels, Avis Rent-a-Car, Hartford Fire Insurance, and the maker of Wonder Bread, among others. ITT broke up in the 1990s.

Munger was back on the attack this weekend saying Valeant relies on "gamesmanship" to run up its value. While its strategy of using acquisitions and price increases is different from ITT, it still created a "phony growth record," Munger said.

And that phony growth record has finally caught up with the company and doomed the VRX stock price...

Valeant Stock Price Falls Because Strategy Is "Deeply Wrong"

In the interview, Munger called Valeant's practice of acquiring rights to treatments and boosting prices legal but "deeply immoral." Munger likened the practice "to the worst abuses in for-profit education."

In his role as chairman of Good Samaritan Hospital in Los Angeles, Munger said, "I could see the price gouging." But speaking as a storied value investor, Munger said Valeant's strategy isn't sustainable. He also added, "It's deeply wrong."

Munger admitted it's easy to see why investors have been enamored with VRX stock.

"It looks kind of Buffett-like," because CEO J. Mike Pearson "cut out all the glitz" of running a drug company, he said. But the crashing Valeant stock price shows why morals should still be a part of the calculation for making an investment.

"They're deeply intertwined," Munger said. "I don't think that investing should be divorced from reality."

Valeant grew by leaps and bounds over the last several years as a serial acquirer of smaller companies. It domiciled in Canada for a lower tax rate and continued to cut research costs.

Much of the company's growth is also attributed to the fact it hiked prices of its newly acquired drugs - a move which has recently irked regulators.

Valeant is now being asked to explain its decision to raise the prices for two cardiac care drugs it acquired in February. Valeant boosted the prices of Nitropress and Isuprel by 525% and 212%, respectively.

Additionally, U.S. attorney offices in Manhattan and Massachusetts issued subpoenas to the company related to its patient assistance programs. Valeant offers financial assistance to offset the cost of the treatment for patients who are unable to afford its drugs.

Under federal law, companies are not permitted to provide assistance to patients insured by Medicare or other government insurance programs because it's considered an illegal kickback. Instead, Valeant Pharmaceuticals and other companies give funding to private foundations that independently help Medicare patients.

Money Morning Global Credit Strategist Michael E. Lewitt saw the VRX stock price drop coming and said it was a "deeply troubled company" before the recent rout.
"This predatory business model has enriched management and a bunch of hedge funds but has left everyone else with whom the company has come into contact severely damaged," Lewitt said.

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