Time to catch up briefly on one of everybody’s favorite drug companies, Valeant. Back in October, there was a lot of arguing going on about the company’s business model, and their apparent use of, well. . .creative techniques to make sure that as many prescriptions as possible were filled for their portfolio of very pricy drugs. Throughout it all, Bill Ackman of the Pershing Square fund, a huge believer in (and investor in) Valeant, stood firm. The stock went on quite a wild ride, and Pershing Square’s position had some pretty bad moments, but they defending their investment (and Valeant in general) at great length.
Well, since then there have been developments. One of those is the unexpected sidelining of the company’s CEO, Mike Pearson (you’ll remember him as a great booster of R&D). Pearson has been out on medical leave, starting during the holidays, and there seems to be no indication of when he’s coming back. Or if he’s coming back. He apparently came down with severe pneumonia, and as someone who came down with pneumonia in both lungs early in January, I actually have a lot of sympathy. Pneumonia absolutely sucks, and there are people who go through it a lot worse than I did. But I wouldn’t say that I’m completely recovered, myself, and it’s been a month now. I can well understand how, a hundred years ago, it used to be a leading cause of death across all the age groups, with a mortality of up to 30% – I would not have wanted to try my luck without modern antibiotics, and I can tell you that with great depth of feeling.
Pearson’s absence, though, does leave some uncertainty hanging over the stock. And on top of that, there are still those questions about Valeant’s business model and practices, well illustrated by this new post from Bronte Capital, whose John Hempton has been long one of the people calling attention to these things. He notes that a key point of Pershing Squares’ lengthy defense of Valeant was that price increases really weren’t all that big a part of their business. “Volume is primary growth driver for ~90% of Valeant’s business” went one of the PowerPoint slides, and statements by Mike Pearson (on conference calls, etc.) were consistent with this, too. Volume, volume, volume – that’s how they do it, folks, because people just want more and more of those Valeant products. Ramming the prices of the existing products through the ceiling? A minor factor. Setting up networks of shadowy specialty pharmacies to make sure that they dispense only the Valeant alternatives, and damn the prices? A nonissue. It’s volume, that’s all, and who doesn’t like to hear that?
But as that Bronte post shows, if you dig through the documents that were produced as a result of Congressional subpoena, you find Valeant’s (former) CFO writing CEO Pearson last May, saying “Last night, one of the investors asked about price vs volume for Q1. Excluding marathon, price represented about 60% of our growth. If you include marathon, price represents about 80%” (That refers to the February acquisition of Marathon Pharmaceuticals – the prices of the acquired drugs immediately doubled, tripled, quintupled in price). This is, to say the least, inconsistent with public statements by Valeant and its corporate officers.
See the post for more. One has to wonder about how Valeant might bring these two worldviews into line with each other. Or how Ackman and Pershing Square can continue to talk about the vast amount of due diligence they did to decide that Valeant was a growth-and-volume-driven winner. Someone’s wrong – or worse than just wrong.