I wanted to address an issue that came up in a comment to the last post. Here we go:
When you start a company like VRX, the sales can not support 15% of sales R&D. So they buy other drugs which, with all due respect, is equivalent to spending on R&D, IMO. I miss your point that it is not (i would love it if you can explain it again).
Gladly. I see where this commenter is coming from, in one respect. Let’s say that Company X has discovered and developed a drug. When a company like Valeant goes out and spends (say) 500 million dollars buying Company X, they are indeed spending money on the R&D efforts of Company X. But that’s not the same as spending 500 million on R&D yourself. Company X spent their money on chemists, biologists, formulations scientists, toxicologists and more, on lab supplies, NMR time, stability testing, LC/MS maintenance, rodent chow, and a list that goes on down the page. The people who do all this work are specialists who have put many years of their lives into learning their fields, and are paid accordingly. This is all what I mean when I talk about R&D spending.
Valeant waited until Company X had already spent all this money, of course. They are not so foolish as to spend their own cash on such pursuits. I mean, look at Company Y down the way. They did something very similar to what Company X did, but their drug didn’t work in the clinic, so Company Y is no longer with us, and all of its people are looking for new jobs and wondering how they’re going to pay their mortgages. Valeant is free to then buy Company X, since their drug survived, but in doing so they spend no direct money on R&D per se. In fact, when they buy Company X, they are going to sell all the research equipment as surplus, shut down the building and turn off the lights, and fire every single person who was working in the labs. They have actually destroyed R&D capacity – that’s part of their business. They take great pains to shut down research activity as quickly as possible when they buy a company, because all that stuff costs money, and it’s dedicated to something that Valeant has no interest in or need for: trying to find the next new drug. That’s a job for other people at other companies.
The money that Valeant spent to buy Company X does not cause any further R&D to take place. It goes into the pockets of the shareholders of Company X, who are now shareholders of Valeant. Mutual funds, pension funds, money managers of all sorts: these folks held the great majority of Company X’s shares, and they have been enriched by the transaction, and presumably have no reason to complain (or they wouldn’t have voted their shares for the deal). These folks are free to invest in another R&D company, of course, but they don’t have to. They can do what they like. Maybe the housing sector is hot right now – the money will all flow over there instead. Some of the shareholders were probably officers of Company X itself, who (though enriched on a smaller scale) are also probably now out of a job. Some of them might go back and try to found new companies, but the money they got from this affair alone won’t do that, and some of them are just going to retire or try to find work at another company somehow.
If I buy an existing building, I am not spending money on architecture. If I buy a hundred-year-old painting, I am not spending money on brushes. And if I buy a drug that has already made it to the market, I am not spending money on R&D. I hope this has clarified my point.