With Valeant facing constant criticism about their business model, other pharmaceutical companies following similar business models are starting to come under the magnifying glass.
Horizon Pharma PLC and Mallinckrodt PLC are two large companies often compared to Valeant. Their shares of stock prices have fallen roughly 25% in the past three months. Concordia Healthcare Corp., another company frequently compared to Valeant, has seen its shares fall 42% in that three-month period. All together, the three aforementioned companies have lost more than $4 billion in market value since late August.
Similar to Valeant, Horizon, Mallinckrodt, and Concordia have all limited the costly investments in research and development that are typical of pharmaceutical companies and instead focused their energy, time, and money on sales growth through debt-fueled acquisitions. These acquisitions have typically been of older drugs, which the companies purchase and then raise the price of significantly. Up until recently, the shares of companies with models similar to this did extraordinarily well, as many investors originally embraced the business model.
Recently, however, investors have been rethinking and reevaluating the business model. One of the reasons for the recent investor concern and subsequent drop in market share is the frequency with which government has shown their desire to implement new price controls. As we have previously written, 2016 presidential candidates on both sides of the aisle have hinted at some form of government intervention, and the current administration has made drug pricing somewhat of a priority, with the most recent action being the HHS Pharmaceutical Forum on November 20, 2015.
Increased pressure from pharmacy-benefit managers is another concern, as in recent weeks pharmacy-benefit managers have been quick to terminate contracts with pharmacies that dispense high-price drugs made by Valeant and Horizon. Pharmacy-benefit managers have a powerful position when it comes to life sciences companies as they manage drug spending for employers and health insurers and determine which companies to do business with. Relationships between pharmaceutical companies and pharmacy-benefit managers have come under scrutiny as well, as it has recently come out that some companies work with pharmacies to help handle patient reimbursement and copay issues.
Given that these companies have chosen to forgo the typical research and development, the companies have been unable to develop new medicines, limiting their ability to grow.
According to the Wall Street Journal, Liav Abraham, a Citi pharmaceuticals analyst, describes the situation as a “house of cards,” where investor worries about the companies’ growth prospects cause the share prices to tumble, which in turn creates new concerns about the company’s ability to finance future drug acquisitions with stock, which send the stocks even lower. “It’s almost a self-fulfilling prophecy and it’s driven by the fact the business model is driven by M&A and getting the most out of the assets you acquire, not necessarily focusing on innovation in the way that biotech and big pharma does.” It’s a spiral that does not look promising to the future of companies with similar business models to Valeant.
Horizon and Mallinckrodt say they are different from Valeant and that their price increases are justified because their drugs’ previous owners had underpriced them relative to their value. Horizon and Mallinckrodt both claim to be investing more money in clinical trials in an attempt to expand the use of their drugs in new diseases. Valeant insists that its business is not reliant on price increases and will instead grow based on prescription volume growth.
Mallinckrodt’s CEO Mark Trudeau states that their business model “couldn’t be more differentiated from Valeant” and that their high-price drugs actually save the health system money over the long-term by improving patient health. On a recent call with investors, Mr. Trudeau attempted to relax any concerns by saying that Mallinckrodt is “in a very strong cash position” and that it might be looking for other deals, especially considering “what’s gone on in the market over the last three or four months, a lot of the assets [Mallinckrodt has been] looking at, the price points have dropped.”
Horizon CEO Timothy Walbert is displeased that his company is being associated with Valeant, as Horizon tends to focus more on acquiring innovative medicines for rare diseases, such as Actimmune, a treatment for inherited disorders affecting immune systems and bone growth.
According to the Wall Street Journal, these companies all have strengths that make them appealing to investors, such as good cash flows and growing prescription volume for some of their key products. Umer Raffat, an Evercore ISI analyst, says that the fall in these stocks is driven more by uncertainty than it is by fundamentals. Some investors are looking to shift their money to safer, more traditional R&D focused drug makers, to mitigate their exposure to volatile stocks.