How Valeant Went from Wall St. Darling to Pariah
nymag.com
nymag.com
Everybody should read this article.
If you don't here's a summary:
- Valeant is a struggling little pharma in early 2000s.
- They recruit their favorite McKinsey strategist - J Pearson - as CEO to change.
- Pearson's strategy is to cut off all R&D to drive up profits.
- Keep prices at "expected" levels that bake in high R&D. Instead just eat the profit.
- Rinse and repeat through acquisitions.
- Not enough money on the table from that. So let's raise prices dramatically. Find new ways of fucking over the system of slow-to-move regulators and insurance companies. Like let's combine generics and "rebrand" them and price gouge.
- Participate in Wall Street financial engineering to "merge" with a Canadian company to enjoy lower tax rates despite HQ and CEO operating in New Jersey.
- Charlie Munger, Buffet's partner, saw the debacle for what it was stating that he was "holding his nose", as one of his largest shareholders began investing heavily in Valeant.
- And now my favorite part - Bill Ackman who is probably best known for his crusade against Herbalife's business practices - LOVES this company. Takes a huge bet, helps Valeant drive takeovers.
- The thing begins to come unglued when the sheer audacity of Valeant extends to pretending that they're smaller, specialty pharmacies and are flatly skirting the laws through financial and legal engineering.
This whole article literally made me sick to my stomach.
It's disgusting.
How the two worst pieces of shit - in two markets notorious for pieces of shit - Wallstreet & Pharma - managed to come together for one ultimate shit show is amazing in its blind luck.
I hope they go under. Actually, I hope they're acquired at firesale prices by a much better pharma which then lays off all the Valeant execs responsible for bizdev, finance & global leadership.
An idea I've toyed with for a while is to strip patent protection from pharmaceuticals and replace it with a guaranteed royalty, so that inventors are sure to be compensated while the market is open to compete for lower manufacturing costs, maybe have a clause stating that minor molecular changes with no effect on the intended condition the drug is meant to treat don't count as novel, as they do under the current system.
I can't tell if the idea is good or bad yet. What does HN think?
> - Keep prices at "expected" levels that bake in high R&D. Instead just eat the profit.
I don't think it's so clear whether this part of the strategy actually makes money. After all, to get those drugs, somebody else had to do the R&D, then Valeant purchased the drugs. So at the very least, the cost of those purchases has to be subtracted from the "extra" profits. The cost of future company/drug purchases also has to be subtracted, to account for the fact that no new drugs are going to result from no R&D.
Don't they just end up paying for R&D at once during an acquisition instead of paying for ongoing R&D themselves? How is this supposed to make money for them?
I personally think it's less to do with R&D than with lazy analysts and accountants: they cut the R&D spending, but convince inattentive observers to apply the same valuation multiples that otherwise apply to pharmaceutical companies that do their own R&D, so the observers ignore the necessary future costs of acquiring R&D companies. The same logic would work for all their weird insurance shenanigans — they trick people into thinking those are the same "type" of revenues that they see at other companies.
Oh and I'm sure he drove tons of money into consulting projects w/ McK. Who do you think helped him identify which companies to take over, build the pricing models to maximize profit, and devise the financial schemes needed to drive up the price of its share?
Behind every Enron, Valeant, etc. is a team of consultants...