Joe Nocera: Valeant Pharmaceuticals looking like another Enron
Eye-popping growth and questionable acquisitions raise far too many questions
Michael Pearson, chairman of the board and chief executive officer of Valeant Pharmaceuticals: His methods proved he didn’t have much patience for research and development. Photograph: Christinne Muschi/Reuters
Valeant Pharmaceuticals is a sleazy company. Although it existed before 2010, it did a deal that year that put it on the map. The deal was with Biovail, one of Canada’s largest drugmakers – and a company that had run afoul of the Securities and Exchange Commission.
In 2008, the SEC sued Biovail for “repeatedly” overstating earnings and “actively” misleading investors. Biovail settled the case for $10 million.
As it happens, 2008 was the same year that a management consultant named Michael Pearson became Valeant’s chief executive. Pearson had an unusual idea about how to grow a modern pharmaceutical company. The pharma business model has long called for a hefty percentage of revenue to be spent on company scientists who try to develop new drugs. The failure rate is high – but a successful new drug can generate more than $1 billion in annual revenue, which makes up for a lot of failures.
Pearson didn’t have much patience for research and development. And while he certainly wanted moneymaking drugs, he didn’t really need blockbusters to make his business model work. His plan was to acquire pharmaceutical companies, fire most of their scientists and jack up the price of their drugs. Biovail gave him the heft to put his plan in action.
And so he has done, to the delight of Valeant’s shareholders, and the dismay of most everyone else.
Before Pearson took control of Valeant, it spent 14 per cent of its revenue developing new drugs. Last year, that number was under 3 per cent. Meanwhile, Pearson has been ruthless about price hikes; in February, according to the Wall Street Journal, the company raised the price of one heart drug by 525 per cent and another by 212 per cent – on the very day it acquired the rights to the drugs. Complaints from patients, doctors and insurance companies have prompted investigations by federal prosecutors in Massachusetts and New York.
In the seven years Pearson has run the company, Valeant has done more than 100 deals. Its growth has been supercharged, and so has its stock price. Pearson has become a billionaire.
Close relationshipFast forward to October 19th. During a conference call with investors, Valeant disclosed a relationship with a specialty pharmacy called Philidor RX Services, a relationship in which Philidor seemingly does business with no one besides Valeant, and that is so close that Valeant consolidates Philidor’s financials while holding Philidor’s inventory on its books. During the call, Valeant also disclosed it had paid $100 million for an option to buy Philidor, though it had not made the purchase – a very strange deal indeed.
It made these disclosures because Roddy Boyd, a former New York Post reporter who now runs the Southern Investigative Reporting Foundation, had found out about the Philidor relationship and begun asking questions. So had several Wall Street critics of the company, including John Hempton of Bronte Capital.
Valeant’s disclosures last week – along with subsequent allegations by Citron Research that Valeant was cooking the books – as well as stories by Boyd and several others have caused the stock to tank.
On Monday, Pearson and his executive team held a lengthy conference call with investors in which they insisted Valeant had complied with “applicable law”. But Valeant also announced that a committee of the board would investigate the ties with Philidor. And it urged the SEC to investigate Citron. This was also a tactic Biovail once used to silence its critics; it backfired spectacularly when the SEC concluded that the critics were the ones who had it right.
It is difficult, if not impossible, to understand all the implications of the Philidor-Valeant relationship, or whether anything genuinely illegal has taken place. But the whole thing looks pretty, well, sleazy.
As the New York Times’ Andrew Pollack pointed out last week, Valeant uses Philidor to keep patients from getting generics instead of its high-priced drugs. Philidor negotiates directly with the insurance companies, and saving patients from the feeling the sticker shock their price hikes would otherwise cause. The copay is often waived, which only adds to the allure of using Philidor.
The evidence strongly suggests that Philidor is controlled by Valeant, even though it is supposed to be an independent company. The Wall Street Journal reported that certain Valeant employees work at Philidor using fake names.
But why? And why did Valeant fail to disclose the relationship for so long? If there was really nothing wrong, why did Valeant keep it a secret? Why, even now, are there more questions than answers?
Maybe it will all turn out to be innocent. But I remember another company that Wall Street once swooned over, a company that had eye-popping growth, but also had secrets, which eventually destroyed it.
You probably remember that company, too. Its name was Enron. – (Copyright New York Times 2015)