As the saying goes, if you play with fire, sooner or later you’re going to get burned. It’s true for kids, adults and, yes, even multibillion-dollar companies. Case in point — Valeant Pharmaceuticals (VRX).
Valeant’s penchant for buying companies to add drugs to its portfolio rather than develop drugs itself has finally caught up with it. VRX stock took a 10% haircut on Monday, and despite Tuesday’s modest march, VRX is now down nearly 30% in less than three weeks.
The prod for the pullback? Yes, Democratic presidential candidate Hillary Clinton gets a great deal of the credit for the drubbing, but not all of it. She simply pointed out the truth, and in so doing, likely obliterated a business model that was skating on thin ice from the onset.
And yes, it’s a reason for owners of Valeant stock to worry.
The Tweet Heard ‘Round the World
On the off-chance an investor hasn’t heard, it was a tweet from Hillary Clinton on Sept. 21 that started the firestorm of selling for biotech stocks, including (and especially) VRX stock. That tweet? “Price gouging like this in the specialty drug market is outrageous.”
The tweet was in response to this New York Times article, which pointed out how Turing Pharmaceuticals cranked up the price on a 62-year-old parasitic-infection treatment (called Daraprim) from $13.50 per tablet to $750 per tablet in the span of 24 hours.
Why? Because Turing can — nobody else is making Daraprim right now.
And it’s not an isolated event; many other small-market drugs with only one manufacturer have seen prices skyrocket of late, as measures to stave off monopolistic pricing simply don’t exist in any meaningful form.
As to whether or not Hillary Clinton could or would do anything about it as President remains to be seen. Aside from the fact that she’s not yet the nation’s Commander-in-Chief is one stumbling block. But, even if she should be elected, she can do little without the House and Senate’s ultimate consent … both of which consist of Representatives and Senators who often rely on the financial support of the very drug industry that Clinton is now taking aim at.
Regardless, Clinton brought the problem to light, and no matter who ends up in the Oval Office next year, consumers are now aware of — and angry about — the issue.
Ripe for a Tumble
As for why the bigger and highly-diversified Valeant Pharmaceuticals was upended with so many other specialty pharmaceutical names, it, too, is specialty drug player.
Just to put things in perspective, Valeant spent nearly $11 billion earlier in the year to acquire Salix Pharmaceuticals, primarily for its gastrointestinal relief drug called Xifaxan, which isn’t a prescription most general practitioners have ever prescribed — it’s a specialist’s go-to treatment for select cases. More recently, Valeant spent $1 billion to buy privately-held Sprout, to get its hands on its Addyi drug, which has also been dubbed a “female viagra.”
Point being, despite what it says, Valeant Pharmaceuticals is a specialty drugs player. And yes, Valeant does have a history of jacking up drug prices once it acquires them.
That’s not the sole reason VRX stock was hit particularly hard in light of the renewed political-correctness of hating unfair drug pricing, though. Rather, it’s the Valeant Pharmaceuticals business model itself that was a significant contributor to the recent implosion of VRX stock.
The typical pharmaceutical company spends between 15% and 20% if its revenue on drug R&D. In contrast, Valeant only spends about 3% on research and development of drugs. Instead, it buys companies that own proven drugs.
Valeant does pay dearly for those companies: The purchase of Sprout and Salix were both criticized by investors who felt the suitor overpaid. Valeant counters, though — and this isn’t a bad argument — that given the number of drug failures many pharma and biotech companies see in their own R&D, it’s cheaper to simply pay the premium for promising drug companies.
There’s more to the story, however.
While it may be more cost-effective to acquire proven drugs rather than develop their own, in (too) many cases, acquisitions are only mathematically “worth it” when the company knows it can crank the price up on the drug its buying.
Now, with drug prices finally being scrutinized (and there’s little doubt they are), the “spend big and raise prices” business model may no longer be a viable model.
It’s a problem, because it’s all Valeant knows.
Bottom Line for VRX Stock
As is so often the case, what recent developments for the specialty drug industry’s favor mean for VRX stock is likely less dire than the drug-price-hawks suppose, but not quite as irrelevant as Valeant would like to imagine. If the scales tip in any one direction, though — now that the reality is starting to resonate among politicians and voters — they’re tipping against VRX stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
