After seeing its stock price soar, Valeant Pharmaceuticals of Canada is now under pressure and its shares are down more than 60 percent. Several hedge funds that are principal investors in the high-flying, high-profit company, are fiercely defending it against allegations of improper business and accounting practices. Federal prosecutors are looking into the company’s drug-pricing, and an online pharmacy with which Valeant had a close relationship — Philidor — has closed its doors amid allegations of improper sales practices and fraud.
J.B. Silvers, professor of health-care finance at Case Western Reserve University, said Valeant uses every market tool available to push its drugs at the highest possible price to pharmacy-benefit managers, insurers, drugstores, and patients.
Silvers called this, “the exploitation of a market imperfection. We have the illusion that drugs are a competitive business, and that the competition is good enough to drive prices down to some sort of fair rate.”
Silvers said that for many drugs, including some that Valeant has acquired through its aggressive acquisition strategy, there isn’t much competition. That goes for high-priced specialty drugs that aren’t widely used or have to be administered by IV, older brand-name drugs that have never faced a major competitor, and drugs still under patent with no generic rivals.
“Basically, Wall Street-driven money, hedge funds largely, are going in and saying, ‘There’s a lot of money on the table,’” Silvers said. “’Buy that company, buy that drug, jack up the price.’ You can understand the business strategy, it’s just not very socially responsible.”
Some of the drugs that are pushed aggressivelyl through market channels can make health care more expensive, with no medical justification, said Albert Wertheimer, professor of pharmacy at Temple University. “The problem is that none of these branded products are at all superior to fine generic products that are available at much lower prices,” Wertheimer said.
As Valeant’s business practices — and mounting legal problems — become known, it is being punished on Wall Street. Cornell law professor Lynn Stout is author of “The Shareholder Value Myth.”
“Surely they must have known that at some point there would be pushback,” Stout said. “But the reality is that the hedge fund industry has been very profitable by following these strategies: buy, do everything you can to get the share-price up, then sell and get out.”