[BREAKING] As we published this Thursday morning, news broke that Valeant is now under federal investigation in Massachusetts and New York for its drug-pricing practices. VRX shares were down -11.5% at open. Stay tuned here.
Every once in a while, a single company combines virtually all of the market’s most toxic forces. Today I feel it’s my job to expose such a company for the bad investment it is. Here’s why.
- It’s got a risky and predatory business model.
- It’s leveraged up to the hilt, with $30 billion of debt on just $9 billion in revenue in the trailing 12 months.
- It’s on the radar of politicians, which is trouble for shareholders.
And here’s the real problem…
- It’s widely owned by investors like you. Even if you don’t realize it, you may own this stock in any of the seven ETFs that hold it as a component.
Already the stock dropped -25% in September. In a Super Crash, it’s going to be much worse. This stock is a yo-yo. It gained +6.48% yesterday, but the day before it lost -4.21%.
And it’s really in trouble now.
The company I’m talking about is Valeant Pharmaceuticals International Inc. (NYSE:VRX). Today let’s just focus on Valeant’s cynical and leveraged business model.
This is a $60 billion multinational pharmaceutical company with a portfolio of prescription drugs, including Kinerase and Wellbutrin, one of the most frequently prescribed antidepressants in the U.S., and consumer products, mostly in the skin, eye, and oral care segments. Valeant’s revenues more than doubled from 2012 to 2014, jumping from $3.48 billion to $8.25 billion in just two years.
But look closely as how it did that…
VRX has achieved its status as one of the fastest-growing pharmaceutical companies in the world while taking advantage of every conceivable legal and tax loophole available. It has enriched its management and a small group of hedge funds while contributing to skyrocketing healthcare costs and leaving the bill for U.S. taxpayers and consumers to pay.
Valeant is the poster child for putting profits before principle.
VRX buys other companies using enormous amounts of junk bonds, then fires most of their employees to cut costs, and then raises the prices of the drugs it acquires. It spends only 3% of sales on research and development of new drugs compared to 15-20% for other drug companies. And the company pays very low taxes because it is officially based in Canada though it operates from New Jersey. Take a look at the image below (from Wikipedia) for a sense of what Valeant’s “growth” has really looked like.
The company claims that it isn’t “good” at R&D, but that is just an excuse because it has decided that it is more lucrative to buy other companies’ drugs and then mark up their prices. According to an analysis performed by Deutsche Bank Securities, VRX’s average annual drug price increase has risen from 21% in 2012 to 66% in 2015. The 66% increase is five times higher than its nearest rivals. For example, Pfizer has raised prices by an average of only 9.6% this year according to Deutsche Bank. One example is the diabetes drug Glumetza, which belong to Salix Pharmaceuticals. Valeant acquired Salix this year and promptly raised the price of Glumetza from around $896 to $10,000. (Look for the October 5 New York Times report on this.)
So while the Federal Reserve is busy telling people that inflation is too low, drug prices are experiencing hyperinflation. The Fed can get away with promulgating this nonsense because most consumers don’t pay for their own drugs – insurance companies and the government pick up the tab. But that does little to bend the healthcare cost curve.
The potential problem for VRX is that it has $30 billion of debt that it has to service. The company is dependent on its ability to keep making debt-funded acquisitions and raising drug prices. In the current market and political environment, its ability to do both are coming into question.
In other words, VRX is a highly leveraged “serial acquirer” that buys other companies only to fire their workers and hike the prices of their drugs for consumers whose costs fall mostly on insurance companies and the U.S. government. This is the state of corporate finance and healthcare policy in America in the Age of Obama.
But it’s about to backfire…
Next time I’ll show you something even more insidious.