Given the size of the Valeant Pharmaceuticals disaster, I’m shocked by how little anger there is out there. Investors lost billions when Valeant went bust. At its peak, it was the dominant player in Canada’s largest stock market index, and when it imploded in late 2015, the whole index sagged. The stock was so widely held, pretty much everyone who owned a broad-based Canadian equity mutual or index fund lost money.
As with all disasters, it’s tempting to search for a glint of positivity amid the smouldering ruins—perhaps a lesson learned that will prevent this kind of thing from happening again. But I had trouble finding one, until I realized Valeant wasn’t really a pharmaceutical company at all.
For subscribers: The inside story of Valeant's fall
When now disgraced former CEO Michael Pearson took over the company in 2008, his strategy was to buy up a bunch of smaller drug companies, slash research and development costs to almost nothing and then hike prices to boost profits.
The Street loved this plan—after all, researching and developing new drugs is a bit of a mug’s game. A company can spend millions creating a new medication, only to find it has serious side effects or simply doesn’t work. Much safer—and more profitable—to bet on established drugs.
The thing is, if a company is no longer developing drugs, it’s no longer a drug company. Valeant borrowed huge sums of money to invest in acquisitions, which it financially engineered to extract maximum profits. Buying up assets just so you can extract more value from them? That’s not a company—that’s a hedge fund.
Such schemes sound clever, but as the cover story for the April issue of Report on Business magazine shows, they rarely succeed over the long term. You can boost profits temporarily by hiking prices or slashing costs, but there’s always a ceiling there.
No one knows more about unleashing an asset’s potential than Bill Ackman, the legendary Wall Street hedge fund manager and CEO of Pershing Square Capital Management. He’s made billions by gaining control of existing companies like Wendy’s International and Canadian Pacific Railway, bringing in new management to cut costs or restructure and then selling off his shares at a profit.
That’s why it’s so delightful that he lost his shirt on Valeant—if anyone should have known better, it’s him. He went all-in, sinking billions into the company. By mid-March, he’d lost faith, cashed out completely and Pershing Square had lost about $4 billion (U.S.) in total. It was the worst investment he ever made.
Ackman should have realized Valeant’s strategy would run into trouble. Eventually, you simply run out of desirable companies to buy. And even in the walled garden we call the prescription-drug marketplace, you can’t just keep hiking prices. Sooner or later, the insurers, drug plans and governments start fighting back.
When I look for investments, I’m a little old-fashioned. I prefer companies that create products and services people actually want. Products that can survive on the open market because they’re better and more reasonably priced than the competition.
Smart guys like Pearson and Ackman probably think I’m a bit of a yokel. But I can’t think of a single corporation that has thrived over the long term without offering superior products or services at competitive prices. Maybe the real lesson from Valeant is that sometimes the smartest guys in the room aren’t so smart after all.
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