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Valeant Plunge Spotlights Cracks in Specialty Pharma's M&A Facade

Image: Valeant Plunge Spotlights Cracks in Specialty Pharma's M&A Facade
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Thursday, 22 Oct 2015 09:33 AM

A simple promise turned Valeant Pharmaceutical International Inc. and some of its rivals into stock market darlings: we will buy more companies and make more money selling drugs. Now investors worry if they can still deliver.

Valeant's shares dropped as much as 39 percent on Wednesday, equivalent to about $20 billion, after Citron Research, a short-selling firm, published a report accusing it of using specialty pharmacies to inflate its revenues.

Valeant refuted the claims, but its shares still ended down 19 percent, as the report brought into the spotlight risks involved in its business model based on rapid expansion driven by acquisitions and aggressive price hikes.

Mounting political opposition to rising drug prices combined with sliding shares, often used as currency to pay for acquisitions, are now casting doubt on whether specialty pharmaceutical firms such as Valeant can deliver promised brisk earnings growth.

Shares of Valeant peers, including Endo International Plc, Mallinckrodt Plc and Horizon Pharma Plc also suffered significant declines. Together with Valeant, they account for 8 percent of all pharmaceutical sector mergers and acquisitions announced worldwide since 2008.

"[Pricing power] had contributed to their increased profitability, which in turn contributed to a higher stock price and more accretive acquisitions," said Leonard Yaffe, who runs a healthcare hedge fund Stoc*Doc Partners. "A lot of that has unraveled."

The controversy over how Valeant books revenue comes weeks after U.S. Presidential candidate Hillary Clinton and Democratic lawmakers criticized price hikes in the U.S. drug industry, triggering a broader selloff in the life sciences sector.

The United States has no price controls on medicines even though such curbs are common in Europe, but specialty pharmaceutical firms, which typically focus on expensive drugs used to treat chronic or life-threatening conditions, are particularly prone to public backlash. Last week, Valeant disclosed that its pricing and other practices were under investigation by federal prosecutors in New York and Massachusetts.

Increased drug price scrutiny could also eventually lead to tougher industry rules, such as allowing Medicare to bargain directly with drug makers, said Jeffrey Loo, director of healthcare equity research at S&P Capital IQ.


Even though Citron produced no hard proof, its accusations tapped into investor anxieties about specialty pharmaceutical companies' ability to keep raising revenues, added Yaffe, who is 'short' on Valeant, betting its shares will fall further.

Valeant has attracted attention with several high-profile drug price hikes, including heart medication Isuprel, which it has increased eightfold since it was acquired in 2013.

Horizon Pharmaceuticals also attracted attention for increasing the price of pain relievers Vimovo and Pennsaid by 1200 percent and 515 percent sine 2013 respectively.

"I think in the near-term you will see these companies pull back a bit on acquisitions that rely on price hikes. The decline in the stock price may put somewhat of a crimp on deals going forward," said Loo.

Endo Pharmaceuticals has also drawn comparisons to Canada-based Valeant due to its reliance on a Irish domicile that offers tax advantages and gives it an edge in acquisitions. It significantly stepped up buying drug makers after hiring Chief Executive Officer Rajiv De Silva, who was previously president of Valeant. Endo said on Wednesday that specialty pharmacies accounted for only 3 percent of the company's projected 2015 revenues.

Not all analysts share the same concerns as the stock's sellers. Umer Raffat, a managing director at Evercore ISI noted that the majority of Valeant's nearly $40 billion in acquisitions have not been dependent on price hikes, including its two largest, the $16 billion purchase of Salix Pharmaceuticals and the $9 billion acquisition of Bausch & Lomb.

In its third-quarter earnings call on Monday, Valeant distanced itself from price hikes as a growth strategy, noting that its 2015 core profit target only assumes a 10 percent increase in prices. Chief Executive Michael Pearson also said that the company did not see any compelling acquisition targets at the moment.

Valeant also revealed plans to explore a spinoff or sale of its legacy portfolio, which is the most reliant on increased prices for growth.

"While Mallinckrodt does not publicly quantify contributors to revenue growth, since becoming independent the majority of our growth has been through increased volume," the company said in a statement.

© 2017 Thomson/Reuters. All rights reserved.

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A simple promise turned Valeant Pharmaceutical International and some of its rivals into stock market darlings: we will buy more companies and make more money selling drugs. Now investors worry if they can still deliver.
valeant, pharma, stock price, citron
Thursday, 22 Oct 2015 09:33 AM
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