Confidence in Valeant Pharmaceuticals International Inc.'s growth story is cracking.
Shares in the Laval, Que.-based company plunged as much as 20 per cent – to a level not seen in more than two years – on Thursday as a growing list of allegations, investigations and public relations nightmares cast doubt on the future of what was recently one Canada's most compelling investments.
"They really possess very little in redeeming qualities in the eyes of the public," said Peter Mann, portfolio manager at Gluskin Sheff & Associates, which sold its small Valeant position in September. "The market overall has probably reached its saturation point."
The questions at the heart of Valeant's woes focus on the company's core strategy – growth driven almost exclusively through acquisition and steep increases in the prices of the drugs it acquires, rather than research and development.
"Valeant is actually the only large company that's gone all the way with this," said Derek Lowe, an organic chemist who has previously worked for several major pharma companies and now runs a website monitoring the industry.
"There's a big difference between augmenting your own research efforts with outside deals – or trying to – and zeroing out your own research altogether."
Since 2010, Valeant has completed about 100 acquisitions – helping transform the firm into Canada's most valuable company, but also leading to debt that now sits at more than $30-billion. Valeant's market value rose to more than $100-billion in the summer before crashing below the $30-billion mark on Thursday.
Large investors have been fleeing as well. Weitz Investment Management said on Nov. 2 on its website that it had exited its Valeant positions, while hedge fund Blue Mountain said it got out of the position in October, but did not rule out getting back in. While Blue Mountain did not name Valeant in its letter, a source said it was clearly the drug maker. Hedge fund Jana Partners has also exited Valeant.
The company's bond yields tell a similar story. The yield on Valeant's 10-year bond, which just a month and a half ago was at 5.6 per cent, now hovers closer to 8 per cent – a sign investors are less confident than they used to be about the company's debt.
Taken together – in addition to the wave of public backlash, circling short-sellers and myriad investigations – the numbers prompt a fundamental question: Just how long can a company that already has some $30-billion in net debt continue to buy its way to the top?
"If everyone knows that you have to make deals in order to survive, the price of deals goes up," Mr. Lowe said. "I think that's what's happened to Valeant; it's been costing them a lot of money to buy all these companies, and one of the issues is how they're going to service all that debt."
Valeant's dramatic decline in fortunes has created an industry-wide moment of pause, as everyone from federal investigators to retail investors begins to look more closely at how the company and others like it make their money.
"What Valeant did ... points to bigger questions about how equitably the industry prices pharmaceuticals when they don't have transparency in place about the true costs of research and development," said Jillian Kohler, an associate professor and director of global health at the Leslie Dan Faculty of Pharmacy and the Munk School of Global Affairs at the University of Toronto.
"I think Valeant has truly created a public relations nightmare for itself."
The scrutiny is not letting up. Valeant's cascade of woes continued on Wednesday after a U.S. Senate panel announced a new probe of pharmaceutical industry pricing practices. The Senate's Special Committee on Aging has requested documents from a number of drug-makers, including Valeant, as it seeks to investigate a trend of drug manufacturer price hikes that numerous big-name U.S. politicians have called outrageous.
"Some of the recent actions we've seen in the pharmaceutical industry – with corporate acquisitions followed by dramatic increases in the prices of pre-existing drugs – have looked like little more than price gouging," said Democratic Senator Claire McCaskill, one of the committee co-chairs. "We need to get to the bottom of why we're seeing huge spikes in drug prices that seemingly have no relationship to research and development costs."
In the case of Valeant, the committee is asking for information on three drugs the company recently acquired: Isuprel and Nitropress, which are used to treat cardiac arrest, and Cuprimine, which is for a genetic disorder called Wilson's Disease. After acquiring them, Valeant raised the price of the drugs by 820 per cent, 625 per cent and 2,949, respectively.
The new investigation is the latest that includes a Federal Trade Commission anti-trust probe and a Department of Justice investigation. Valeant, whose spokesperson did not respond to a request for comment, has said it will comply with those investigations.
Irrespective of the potential fines and penalties, the investigations have already taken a toll on Valeant's business. The credit rating agency Standard & Poor's issued a downgrade for the company last week – citing, in part, the damage already done to Valeant's reputation.
"One of Valeant's strategies is to ... market to specialist doctors," said David Kaplan, director of the Standard & Poor's health-care group. "The extent to which the company comes across as having been involved in aggressive marketing practice, those doctors are likely to view that pitch with a little more skepticism."
Meanwhile, analysts' views have been shifting, as well. Earlier this week, Goldman Sachs analyst Gary Nachman joined a small but growing number of analysts tempering their view of Valeant's prospects.
"We have less confidence the market will reward the stock any time soon without clarity as to the path forward," he noted.