Unlike traditional drug companies that tend of invest heavily in R&D to develop new drugs and live-saving medicine, Valeant Pharmaceuticals International Inc. is notorious for expanding via acquisitions and then increasing drug prices to fuel growth and reward its investors. For instance, the company bought the rights to a pair of life-saving heart drugs and their list prices rose by 525% and 212% the same day of the acquisition because the drugs lacked any competition from generic products. Not surprisingly, Valeant has been a top-performing stock with large institutional and hedge-fund ownerships. Stock prices rose by more than 1,000% over the last five years before reaching an all-time high of $262.52 in early August, 2015.

Last month, Valeant was in the ‘spotlight’ following a report by short-seller research firm Citron which alleged that Philidor, a specialty pharmacy, fabricating its sales data to inflate revenues especially those with Valeant, a large supplier of drugs for Philidor. Since the allegations, Valeant has discontinued its relationship with Philidor. Wall Street Journal and Bloomberg have also questioned the drug maker’s business. Goldman Sachs downgraded the stock citing concerns it will be awhile before the “dust settles” for Valeant.

Investors have dumped the stock following these starling allegations. Stock prices of Valeant declined from the all-time high of $262 to a low of $78 a few days ago, which is a loss of almost 70%. To compound the downward pressure on the company’s stock, Goldman Sachs called loans totaling $100 million it had made to the company’s CEO, which was backed by 2 million Valeant shares. When the CEO was unable to pay, last week Goldman sold 1.3 million of those shares to cancel the outstanding balance owed by the CEO.

The Socio-Economic Dilemma

The Valeant story presents a riveting socio-economic dilemma, the confluence of a ‘perfect storm,’ where economic imperatives collide with moral fortitude. While companies have the right to increase prices of their products, especially when there is no competition, to sustain investments in R&D, companies are also morally obligated not to engage in excessive price gouging behavior when the products are related to our mortality.

Because drugs can be considered as social goods, government intervention is inevitable when companies engage in price gouging. Regardless of the individual disposition on this matter, Valeant is a highly risky stock because the company is expected to be heavily scrutinized by the government. The Justice Department has already launched several investigations, which might pave the path for a new round of undisclosed bad news.

November 9, 2015; 8.48P

http://www.wsj.com/articles/pharmaceutical-companies-buy-rivals-drugs-then-jack-up-the-prices-1430096431

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