POKING THE U.S. BEAR
Valeant in hot seat on drug prices
Just when it seemed Valeant Pharmaceuticals Inc. was in the clear after being called out by U.S. politicians during a recent drug-pricing controversy, the Laval-based company is once again in the hot seat as it faces subpoenas from two federal prosecutors.
The subpoenas are the latest indication of heightened scrutiny on the pharmaceuticals business in the U.S., and further test the sustainability of a model that relies on serial acquisitions and price hikes, rather than research and development, for growth.
“I think they poked the bear one to many times with these price changes,” said Matthew Herder, who teaches health law and policy at Dalhousie University in Halifax.
Valeant said late Wednesday it was reviewing subpoenas from the offices of attorneys for the District of Massachusetts and the Southern District of New York. After acquiring two heart drugs in February, Valeant doubled the price of Isuprel and increased the price of Nitropress six-fold.
Over the past decade, a number of small pharmaceutical players have acquired existing technologies and focused on marketing and pricing instead of R&D. Thanks to some high-profile takeovers and takeover attempts, Valeant has risen to become the poster-company for this new era.
No longer niche, the growththrough-acquisition model has become a global trend in the industry, and Valeant CEO Michael Pearson said his company is being unfairly singled out.
“There is a misperception in the media that Valeant’s revenue growth for existing products has been driven primarily by price,” Pearson said in a letter this week to U.S. Senator Claire McCaskill, adding that while average price increased 13 per cent from the third quarter of 2014 to 2015, the prescription volume increased by 20 per cent.
The recent pricing furor began with the disclosure last month that tiny Turing Pharmaceuticals acquired a 62-year-old drug, Daraprim, used to treat the parasitic infection toxoplasmosis — often taken by HIV patients and patients receiving chemotherapy — and then immediately increased the price by more than 4,000 per cent, to US$750 from US$13.50.
U.S. Congress then turned its eye to other companies that engaged in these kinds of hikes and Valeant was a clear target after purchasing Nitropress and Isuprel in February then immediately raising prices.
But those aren’t the only drugs Valeant has purchased and subsequently raised prices on.
The controversial short-selling firm Citron Research has published charts showing that Valeant has raised the prices on a number of its drugs, with Ofloxacin antibiotic ear drops topping the list with a 2,288-per-cent increase. Valeant, however, has disputed these numbers, saying there is a difference between wholesale prices and the actual price paid by bulk buyers, which get discounts that often aren’t disclosed publicly.
Raising drug prices isn’t illegal in the U.S., and Valeant has said it will co-operate with the investigations. The company declined to comment.
In the wake of the U.S. uproar surrounding Turing Pharmaceuticals, Democratic presidential candidate Hillary Clinton said that, if elected, she would reform the drug industry to protect consumers from price hikes and industry “profiteering” — a plan that included a mandate on research and development spending.
Brand-name pharmaceutical companies in Canada are said to spend about five per cent of their domestic revenues on research and development, while the U.S., U.K., Switzerland, Sweden, Italy, Germany and France put an average of almost 22 per cent of their sales into R&D.
Valeant, which surpassed Royal Bank of Canada as the country’s largest company by market value this summer before falling to third since Clinton’s pronouncement, spends even less than the national average, putting just 2.7 per cent into research and development.
“You have a system that is destroying research-and-development capacity with mergers and acquisitions,” said Marc-André Gagnon, a professor who teaches pharmaceutical policy at Carleton University in Ottawa. “Valeant is really this model on steroids.”
Gagnon says the provincial and federal governments have made huge efforts to entice drug companies to base themselves in Canada by offering incentives such as tax credits and subsidies.
Valeant, for example, relocated from the U.S. to Mississauga, Ont., after acquiring Biovail Corp., only to move to Quebec in 2012 because the province made a more enticing offer: a corporate structure that gives it a tax rate in the low single digits, versus roughly 20 per cent for its peers.
Gagnon says these types of incentives haven’t resulted in an increase in R&D or an increase in jobs.
“I think right now we provide still way too many privileges to these drug companies and we’re not getting anything in return,” he said. “There’s no reason why we should be providing these privileges anymore.”
It would be an understatement to say that until recently Valeant’s M&A model has been successful in growing the company. M&A brought in US$8.25 billion in revenue last year, up 43 per cent from 2013 and its share price rose from $119.82 at the beginning of August 2014 to a peak of $346.32 at the same time this year.
The negative attention in the U.S. has called into question whether its model is sustainable, with Valeant’s stock sliding more than $100 in the past month to close at $216.73 Thursday in Toronto.
Other analysts believe the worst is likely over for Valeant and that shares will eventually recover.
Alex Arfaei, an analyst at BMO Nesbitt Burns, has held that Valeant’s expertise in ability to identify inefficiencies in its target companies is just as valuable as R&D and argues that fear and uncertainty are creating a buying opportunity.