Valeant Pharmaceuticals pricing controversy attracts scrutiny
Just as 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, Que.- 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 too 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 growth-through-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 who engaged in these kinds of hikes and Valeant was a clear target for 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 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 is not 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.
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.
“We continue to believe that given the current political landscape, new pricing regulations for pharmaceuticals is a very unlikely outcome.
“Once the political storm subsides, we expect business as usual with less aggressive price increases,” said Arfaei in a note.
“We expect continued negative headlines on this issue throughout the election cycle; however, we believe that it is mostly reflected in the stock at this point.”