A simple promise turned Valeant Pharmaceutical International Inc and some of its rivals into stock market darlings: we will buy more companies and make more money selling drugs. Now investors worry if they can still deliver.
Valeant's shares dropped as much as 39 per cent on Wednesday, equivalent to about $20 billion, after Citron Research, a short-selling firm, published a report accusing it of using specialty pharmacies to inflate its revenues.
Valeant refuted the claims, but its shares still ended down 19 per cent, as the report brought into the spotlight risks involved in its business model based on rapid expansion driven by acquisitions and aggressive price hikes.
Mounting political opposition to rising drug prices combined with sliding shares, often used as currency to pay for acquisitions, are now casting doubt on whether specialty pharmaceutical firms such as Valeant can deliver promised brisk earnings growth.
Shares of Valeant peers, including Endo International Plc, Mallinckrodt Plc and Horizon Pharma Plc also suffered significant declines. Together with Valeant, they account for 8 per cent of all pharmaceutical sector mergers and acquisitions announced worldwide since 2008. "[Pricing power] had contributed to their increased profitability, which in turn contributed to a higher stock price and more accretive acquisitions," said Leonard Yaffe, who runs a healthcare hedge fund Stoc*Doc Partners. "A lot of that has unraveled."
The controversy over how Valeant books revenue comes weeks after US Presidential candidate Hillary Clinton and Democratic lawmakers criticised price hikes in the US drug industry, triggering a broader selloff in the life sciences sector.
The US has no price controls on medicines even though such curbs are common in Europe, but specialty pharmaceutical firms, which typically focus on expensive drugs used to treat chronic or life-threatening conditions, are particularly prone to public backlash. Last week, Valeant disclosed that its pricing and other practices were under investigation by federal prosecutors in New York and Massachusetts. Increased drug price scrutiny could also eventually lead to tougher industry rules, such as allowing Medicare to bargain directly with drug makers, said Jeffrey Loo, director of healthcare equity research at S&P Capital IQ.
