The share prices of Valeant dropped in just a few weeks from $ 262 to $ 27. This was due to the main reasons – the company's pricing strategy, the company's $ 600 million overestimation of its target earnings and the debt problems.
Valeant used a pricing strategy where they increased the prices of the drugs of the acquired company to abnormal amounts every time an acquisition occurs. It was noticed that there was a 5500 percent increase in one of the drugs called ‘Cuprimine’ and it now cost $30,000. Valeant had easy access to cheap money to buy drug companies that produced high-value medicines for Valeant.
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One example was Salix Pharmaceuticals. Valeant increased the price of Salix's ‘Glumetza’ diabetes medicine by about 800 %. Similarly, on 10 February 2015, Valeant acquired two drug brands, Nitropress and Isuprel, from Marathon Pharmaceuticals. The two drugs' prices skyrocketed on the same day, as reported by the Wall Street Journal.
The price-raising strategy of Valeant has become its leading money-making scheme. And it used R&D expenses as an excuse when questioned about the high prices. Traditional drug firms rely on innovation and are offset by higher market share and income. Valeant does not invest as much money as other drug companies in research and development (R&D). The company allocated only 3% of its sales revenues to R&D, much less than 15-20% in traditional drug companies. Sometimes, after acquiring the target firms, Valeant even cut R&D investments.
Companies such as Valeant earn tremendous profits by taking advantage of those patients diagnosed with rare diseases and asking insurers for large bill payments. Therefore, insurance companies tend to avoid payment of insurance for such overpriced drugs. Even if insurance companies are willing in the foreseeable future to pay the unreasonably expensive drug prescriptions, the insurance premiums will inevitably increase to cover the extra expense. Ultimately, consumers pay for these increases. Companies like Valeant do not expect patients to pay drug prices that are incredibly high. Instead, they want insurance companies ' money, as insurance plans usually cover the larger proportion of medical expenses and require only small co-payments from U.S. policyholders. However, insurance companies are taking action to stop some overpriced medicines being covered. Price gouging isn't Valeant's only misconduct. This rapidly growing business has also been criticized for its misleading financial disclosures. Because of its unsustainable growth model and lack of integrity by the management, Warren Buffett, chairman of Berkshire Hathaway, declined to invest in Valeant.
The event was initiated by a small pharmacy based in California, R&O Pharmacy. R&O received a letter from Valeant requesting a payment of $ 69 million on September 4, 2015, although R&O had no direct business relationship with Valeant. It was discovered that Valeant had an affiliation with R&O in the sense that Valeant's stakeholder, Philidor Rx, had listed on their website the same contact address and telephone number as R&O's and that Philidor had purchased an option to purchase Isolani, a major R&O shareholder, and had acquired a similar option contract to purchase all R&O shares. More surprisingly, Valeant was the only client of Philidor, and Valeant had an option to buy Philidor as well.
The contract between Valeant and Philidor has a technical name for this type of option contract, 'Variable Interest Entity' (VIE). Valeant should list its VIE holdings on its balance sheet, and Valeant did so, according to the Financial Accounting Standards Board (FASB). However, it is not clear whether and how Philidor should consolidate the results of R&O. The management of Valeant had worked so well that the connections between these firms could hardly be seen by outsiders.
Suspiciously, Valeant has never specifically and explicitly disclosed its option contract details (namely the VIE) on Philidor, but it has consolidated the financial results of Philidor profitably into its financial statements. Philidor's reports from the Wall Street Journal used “aggressive tactics to get insurance companies to pay reimbursements for the often high-price drugs of Valeant”. Philidor was found to have altered prescriptions with the intention of filling more prescriptions with medicines marked with Valeant. Valeant might have conspired against insurers with Philidor, so Valeant could get insurance companies to pay for their expensive drugs.
The drug price strategy, growth model and accounting methods of Valeant are in no way ethical. This company needed to replace both management and the real core culture and practices of the company to achieve ethical and stable business practices.
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