Published: November 13, 3015
JORDAN DEN HERDER
So far, 2015 has been a crazy ride for most of the market. However it seems many stocks have finally recovered to their levels from before the August crash. Then there’s Valeant Pharmaceuticals International, Inc. If you have listened to any market news or picked up a newspaper since mid-September, chances are that you have seen news articles or updates on the Canadian company. Since September, Valeant has decreased its market value by about 65 percent, cutting its market capital from $86 to $29 billion.
The cause of this relentless, out-of-control spiral was, and remains, two-fold. The initial plunge was instigated by a letter sent from the Congressional House Oversight and Government Reform Committee to its chairman that requested a subpoena, forcing Valeant’s CEO and chairman, Michael Pearson, to testify in court. On Feb. 10 of this year, the drugs Isuprel and Nitropress (both vital drugs in preventing heart failure), saw price increases of 525 and 212 percent, respectively. There was no significant change in the drugs or in the research or production of them, however they did find themselves under the rights of a new company, Valeant.
Seeing as this compared closely with a similar case earlier this year where, under control of Turing Pharmaceuticals, Daraprim saw a price increase of over 5,000 percent, lawmakers are looking for answers from the companies’ officers regarding their actions and the motives behind them. Valeant, along with other big pharmaceutical companies, has made the claim that the price increases are to further enhance research for new and better drugs. The companies also defended that Isuprel and Nitropress had only made up about .02 percent of hospital budgets, leaving plenty of room for price surges.
Stockholders have certainly been very skeptical regarding Valeant’s future if they are somehow restrained from future drug price increases. Drug prices have grown at an annual rate of 48 percent for the past eight years, and seem to be a great variable in the company’s success.
University Junior David Velez weighs in on the topic saying, “I feel that Valeant was greedy and unfair to people who struggle with purchasing these drugs, and it could be a benefit to consumer interests for there to be a ceiling that limits drug price inflation.”
This rationale seems to be popular among students and citizens, and should be worrying Valeant, Big Pharma and their stockholders.
However, what may be scaring Valeant stockholders even more than the possibility of government intervention in the company’s way of business, is the recent investigation of Citron Research into the popular pharmaceutical.
The company, which provides online stock commentary, investigates companies and reports any uncovering of fraudulent or skewed business models and actions within companies, declared via social media that they have dirt on Valeant, calling it the “Pharmaceutical Enron”.
Though Citron did not disclose in great detail what they found in their examination, they alleged that Valeant is using a network of special pharmacies to create phantom sales. Citron goes as far as to claim that Valeant’s consolidated Philidor Rx Pharmacy is actually the same company as R&O Pharmacy, and that Valeant is engaged in false transactions with these “companies” to inflate their drug sales in the eyes of shareholders. This would occur via “sales” to these pharmacies that would result in increases of stated revenue, when actually the products are just sitting inventory. Even the idea of this Enron-like, balance sheet inflation would have investors squirming in their seats, and the possibility of it being a legitimate claim, well, we can see how that has affected Valeant thus far.
In the wake of all the news, accusations and conjectures, another thing Valeant has to worry about is their shareholder confidence and loyalty. Not only were shareholders not kept in the loop about these specialty pharmacies, but when CEO Pearson sent out a company-wide letter explaining the company’s situation and plan of action, there was minimal reaction, showing that most people are skeptical about the CEO’s way of handling the scandal.
Valeant is certainly in the negative spotlight, and surely they will be scrutinized in every move they make going forward. It seems the shareholders have been weeded out, and those that are left are very confident in Valeant and their business model, i.e billionaire hedge fund manager Bill Ackman, and many of them believe there is a conflict of personal interest as Andrew Left, CEO of Citron, has also made it public that he is currently short-selling Valeant.
On the other hand, federal investigation of Valeant will most likely ensue, and the truth will emerge regarding Citron’s allegations.
In the meantime, pressure seems to be easing off of Valeant as Citron Research has moved on to dissecting pharmaceutical company Mallinckrodt PLC, disclosing in a Tweet that “$MNK (Mallinckrodt) has significantly more downside than $VRX (Valeant)”.
Being under such concentrated scrutiny of late, Big Pharma needs to batten down the hatches and tighten up its operations if they plan to make it out from under the magnifying glass.
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