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This weekly column offers opinions on the latest pharmaceutical industry news.

As reversals of fortune go, Valeant Pharmaceuticals would be hard to beat.

The drug maker became a Wall Street darling by purchasing products and then jacking up prices to new heights. Bankers collected fees on deals, investors profited on a soaring stock price, and Valeant successfully held itself out as a new industry growth model by pooh-poohing investments in research and development.


Now, though, the Valeant bubble — and it was a bubble — has popped.

After becoming the target of congressional probes, losing most of its share value, and facing the risk of defaulting on its $30 billion debt, Valeant’s provocative business model is falling apart, and many people — patients, taxpayers, and investors, among them — have come out losers.

Here are a few takeaways on what the Valeant saga means for the pharmaceutical industry.


Every drug maker raises prices, but some are smarter than others

Valeant’s price hikes were breathtaking. In 2014 and 2015, the company increased the prices on its 147 drugs by an average of 76 percent, according to the health care software firm Rx Savings Solutions. And the average price of a Valeant drug cost nearly 33 times higher than comparable generics, according to Sector & Sovereign Research.

This helps explain why many health care budgets, both public and private, were increasingly strained, and the cost of medicines became a subject of national outrage over the past couple of years.

Many of the price hikes were on run-of-the-mill drugs that largely escaped notice. But Valeant did anger hospitals early last year when it raised the prices on two life-saving heart treatments by 525 percent and 212 percent on the same day the company bought the products.

The message is simple: aggravate payers and policymakers too often, and there is bound to be pushback. “You can only do that once,” said Richard Evans, an analyst at Sector & Sovereign Research. “After that, it’s game over.”

R&D spending can be wasteful, but that isn’t the same thing as unnecessary

The pharmaceutical industry maintains that prices reflect the large number and high cost of failures in drug development. This argument is losing traction, though, and feeds mounting criticism that R&D spending is sometimes over the top.

Valeant’s outgoing Chief Executive J. Michael Pearson was one of the loudest critics — and under his watch, Valeant spent just 3 percent of sales during the first nine months of last year on R&D. (The average, across the industry, is 18 percent, according to the Pharmaceutical Research and Manufacturers of America.)

It may be true that throwing dollars at laboratory walls is no guarantee of success. But tearing down the laboratory walls is no way to develop needed medicines.

“Pearson had a point when he said there’s a lot of waste,” said Bernard Munos, a former corporate strategy adviser at Eli Lilly who is now a senior fellow at FasterCures, a medical research think tank. “But a smarter model would not have eliminated R&D, because we still want innovation.”

Transparency is the only way to build confidence

This is a basic tenet of corporate governance, but Valeant never learned this lesson. The drug maker blundered badly by failing to report that it held an option to buy a mail-order pharmacy that it was using to boost revenues.

Instead, short sellers disclosed the relationship last fall, prompting suspicion from insurance companies about the way reimbursements were handled. Federal authorities are now examining the details.

The episode began the downward spiral in Valeant stock. A failure to follow certain accounting practices further undermined investor confidence.

“The pharmaceutical industry is under such public scrutiny now that any arrangement that’s kept secret is going to be presumed to be evil,” said Erik Gordon, a business and law professor at the University of Michigan. “All companies should know that transparency matters.”

Not so valiant

In the end, Valeant is a cautionary tale.

Many investors wanted to believe the Valeant pitch that easy money could be made by buying medicines low and then selling them high. But the American public is only likely to tolerate costly medicines when convinced big price tags will deliver cures.

This is the sort of disconnect that turns Wall Street favorites into Wall Street has-beens.