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On Oct. 4, I singled out Valeant Pharmaceuticals International Inc. (NYSE: VRX) as a deeply troubled company, one that was emblematic of just about everything that's corrupt and toxic in today's markets.
The hedge funds loved Valeant thanks to its practice of buying other drug companies using junk bond financing, firing most of their employees – and then sharply hiking the prices of the drugs to which they'd just acquired the rights.
That's an ugly business model. It came into sharp focus in September when Turing Pharmaceuticals' Martin Shkreli bragged about hiking the price of a vital drug essentially just because he could, bringing a ton of bricks in public and political wrath down on the industry's collective head.
Now, I expected VRX shares to plunge, but that ton of bricks landed harder and faster than I thought. And wave after wave of bad news – now including allegations of outright criminal behavior – brought the shares down 40% in one morning, from $148 to below $89 yesterday. The shares eventually rebounded to $118, but not for any good reason.
As you're about to see, for as far as its fallen already, this rotten company could fall a lot farther before it finally craters…
Valeant Can't Catch a Break – and Doesn't Deserve One
This past Thursday, Valeant announced the U.S. government subpoenaed the company over its drug-pricing practices for two specific drugs. The stock dropped sharply in that session and then recovered on Friday. But investors were clearly nervous as they waited for the company's third-quarter earnings report on Monday.
It turns out they had good reason to worry. Earnings weren't the problem; they came in on target. The company earned $3.54 per share on $3.6 billion in revenue, in line with Wall Street expectations. And it nudged up guidance for the year to between $11.67 and $11.87 in earnings per share and said revenue would be between $11 billion and $11.2 billion.
But management announced several changes to Valeant's strategy that suggest that the company is changing course.
First, Valeant said it would reduce its dependence on raising drug prices to boost profits. Price increases have accounted for about 8% of revenue growth in the first nine months of 2015.
Chairman Michael Pearson told investors that "outside pressures" (he really meant politicians) are "changing the pricing environment."
In other words, politicians and the public are appropriately disgusted that a company that spends virtually nothing on R&D is raising prices on old drugs in order to pad its bottom line. For once, the people in D.C. are doing the right thing. As a result, the company expects to keep price increases, which have averaged 66% over the last years, to no more than 10% next year.
He also said that the company would stop buying old drugs and raising their prices, one of its key strategies in recent years. Having been caught with his hand in the cookie jar, Pearson figures he better take it out before his whole arm gets ripped off.
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Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
Good morning,
As a member of the health field, I have wondered for a long time why many generic drugs were rising in price when in general prices on them should fall once they become generic. Its good for the health field that companies like Valeant be called on the carpet for what they are doing. I cannot help but wonder if the FDA did not bring this upon itself. It is so difficult to get drugs to market and the approval process has been challenging for companies. A solution to this mess might be for the FDA/congress to make it easier for private companies to produce generics by fast tracking them, overseeing that their drug manufacturing processes are in place and working, and then help with contracting with Medicare as well as private medical insurance companies at fair prices for both the government as well as allowing the private companies to earn a decent income (not predatory). This would solve a lot of issues including stopping companies like Valeant as well as encouraging the production of good generics at a reasonable price without further government interference to free enterprise. Thanks for your great articles and keep them coming!
You are not very smart…This stock is a screaming buy. The Salix puchase will add 5 Billion in sales when the new drug is fully integrated.
The company could not be any stronger in denying the BS Enron of Pharma short selling propaganda. The specialty pharma issue is just a small percentage of less than 10 percent of sales and has been denied by the company. They own the derma space. Same thing happened with Salix, the stock dropped in half but withing 6 months there was an offer for over 120% of the bottom when the penalty to VRG was factored. This is a screaming BUY
Hello Michael,
What happens to retail investors like us if Ackman buys enough stake in Valeant and starts to split it and sell the parts for profit? Will the regular shareholders lose or will they also profit along with Ackman (if he were to do this?)
Thanks
Valeant is clearly a fraud and they just admitted it. The only ones posting the stock is a buy is the dumb trolls who bought the stock and now hope to mislead others so they can sell vrx junk stock at a higher price. Valeant just admitted Philidor is doing improper business. Read criminal as in changing doctors prescriptions. And criminal as in using other pharmacy codes than the real pharmacy shipping the product. New evidence shows Valeant owns Philidor and is therefore responsible and liable for what they do. Other evidence shows Valeant execs working in Philidor using fake names. Valeant just admitted Philidor is a fraud. But Philidor is also Valeant as its 100% owned by valeant. So valeant just confirmed it is a fraud. The stock will go to zero no matter how many vex investors lie through their teeth claiming the stock is a screaming buy. But the stock is a screaming BYE as it will go to zero over criminal fraud.