valeant: worse than herbalife?

I’ve always been intrigued by how seemingly small events can trigger sudden downturns in overvalued market sectors. In March of 2000, a Barron’s cover story did more than anything to accelerate the bursting of the dotcom bubble. Last week, a single tweet sparked a major selloff in biotechs and pharmaceuticals.

The Nasdaq biotech index fell over 4 percent Monday after Hillary Clinton tweeted about the steep price increase for Daraprim, which treats an obscure but serious parasitic infection. The drug was acquired by Turing Pharmaceuticals in August. Turing’s CEO, a 33-year-old ex-hedge fund manager, raised the price per pill of the medicine to $750 from $13.50. The day after her tweet, Clinton released a detailed plan to curb these apparent abuses of Medicare and Medicaid, which paid nearly $100 billion for prescription drugs in 2013, or about 35% of all retail drug spending.

Health care has, by far, been the best performing S&P industry sector this year, and the best performing stocks in it have been biotechs and pharmas. Clinton’s tweet sent every one of them down, evaporating tens of billions in market value. Especially hard hit were firms that sell prescription drugs addressing “orphan” illnesses, those that affect fewer than 200,000 Americans. One example is Vertex Bio’s Kalydeco. The FDA approved this pill in 2012 for use by roughly 1500 of the 30,000 Americans afflicted with cystic fibrosis. Kalydeco’s opening price was $290,000 a year. Less than a year after approval Vertex raised that to $307,000 a year, or $440 per pill (patients take two pills a day, for life). The cost to make each pill is probably under $4.

The company that has gotten the most negative press during this downturn is the $11 billion revenue giant Valeant (VRX). Valeant has a lengthy history of acquiring both prescription drugs and OTC products and charging more for them, often a lot more. Earlier this year, the Canadian-based company came under scrutiny for boosting the costs of heart drugs Isuprel 525 percent and Nitropress 212 percent on the same day it bought the rights to them.

Wall Street bulls, including most of the 20 analysts who cover Valeant, applaud its management’s “buy and burn” strategy of borrowing money (Valeant has $30 billion in debt), buying smaller firms, then firing the acquired company’s research staff while increasing prices. Some recent Valeant acquisitions – including Medicis in 2012, Obagi in 2013, and the bankrupt Dendreon in 2015 – sell drugs and products that are far from best in class. I know this personally. I visited the managements of all three companies at their corporate headquarters in the last decade.

If Valeant’s strategy isn’t illegal, it is certainly offensive. An argument could be made that it is the health care equivalent of the predatory lending industry, as it is forcing consumers, including the US government, to pay top dollar for much-needed products. More disturbing is the fact that many high profile hedge funds, including Bill Ackman’s Pershing Square, support this strategy. Pershing Square owns 19.5 million shares in the company, according to a recent SEC filing. Despite Valeant’s decline from $264 a share in July to $178 at yesterday’s close, that is still a whopping $3.47 billion investment.

For several years now, Ackman and Pershing have waged a public campaign against the allegedly unethical and illegal behavior of another controversial company, Herbalife. I, too, have doubts about the efficacy of Herbalife’s products. The legality of its multi-level marketing practices is questionable, as well. But if Herbalife were to rapidly raise its prices, nobody’s life or wellbeing would be jeopardized, and American taxpayers wouldn’t be forced to pay exorbitant costs to enrich a Canadian corporation and its Wall Street enablers.

Congress should press on with its investigation of Valeant and other companies in the industry. Depending upon its findings, Medicare, Medicaid, and American consumers might consider boycotting Valeant’s offerings. At some point, the drug industry needs to know that consumers will no longer support companies that overcharge simply because they can.

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