Why 2016 could be a make or break year for Valeant
pharmafile | January 8, 2016 | Feature | Medical Communications, Sales and Marketing | Howard Schiller, J. Michael Pearson, Michael Pearson, Valeant
This could prove a make-or-break year for Valeant.
The specialist drug company begins 2016 with a reputation damaged by allegations of aggressive and possibly fraudulent reimbursement practices to boost sales, under intense scrutiny over drug price hikes, and with its chief executive on indefinite medical leave – from, at the time of going to press, it is unclear if he will ever return.
This week the company announced its former chief financial officer Howard Schiller has been appointed Michael Pearson’s interim replacement, while he recovers from a severe case of pneumonia. This went against Valeant’s earlier announcement that a committee of three executives would fill in for Pearson in his absence, leading some to speculate whether the company is planning for life without the 56 year old, and if Schiller may be kept on in the top job even after Pearson recovers.
A clean break could make sense. While Pearson denied any wrongdoing on Valeant’s part in its relationship to Philidore and other specialist pharmacies, November’s allegations were trying times for the company and its leader, who promised an independent review of the situation amidst considerable pressure to resign.
Price hikes
A month earlier, Valeant received two subpoenas from the US Attorney’s Offices in New York and Massachusetts, demanding information over the prices it was setting for the drugs Nitropress and Isuprel. Valeant increased the price of both drugs significantly after acquiring their rights last year: Isuprel’s by 121%, and that of Nitropress by more than 500%.
Pearson promised to co-operate with the investigation, but at this time, it also emerged that Valeant had increased the price of 56 of the drugs in its portfolio, by an average of 66%. The now stricken chief exec was quoted as saying: “If products are sort of mispriced and there’s an opportunity, we will act appropriately in terms of doing what I assume our shareholders would like us to do.”
Amidst such negative publicity, the company has released sceptical financial guidance for 2016. Although Pearson expects revenue growth, it is set to be much slower than in previous years and forecast earnings per share are down from $14.20 to between $13.25 and $13.75. Its record share price in August 2015 seems a long time ago, with the value now halved.
Acquisitions over R&D
Analysts ask whether Valeant grew too fast, questioning the quick-fire acquisition policy Pearson pursued in recent years at the expense of research and development spending. Even the US pharma trade group that companies look to in defence of the industry have joined the chorus of criticism of Valeant’s business model.
The Pharmaceutical Research and Manufacturers of America (PhRMA) said in October that Valeant Pharmaceuticals’ strategy was akin to that of much-maligned Turing Pharmaceuticals, noting that its strategy is “more reflective of a hedge fund than an innovative biopharmaceutical company.” Innovators in pharma should “have R&D at the core – and the numbers to prove it,” PhRMA argued – a barb presumably highlighting the fact that Valeant has invested on average less than 3% of its total revenue on R&D.
But the company is in a stronger position now than before Pearson’s tenure began in 2008, whatever its current troubles. One acquisition that may change this and that will certainly be under the spotlight in 2016 is the $1 billion that Valeant paid for Sprout Pharma, the small company behind the female libido drug Addyi (flibanserin).
Under pressure from campaigners, the FDA approved the treatment in September 2015, but sales have failed to impress since its launch onto the US market. Investors will expect an uptick this year, or the $1 billion will seem an extravagance. Sprout chief executive Cindy Whitehead has already departed the company.
Schiller’s strategy
And what of interim boss Schiller? It is unclear how long his reign will last, but given the chance, few would expect him to deviate too far from the strategy of growth by acquisition and drug price increases he helped devise alongside Pearson as chief financial officer until as recently as June 2015.
One of Valeant’s largest shareholders, Bill Ackman, who owns 8.5% of the company, welcomed Schiller’s appointment, saying he expected him do an ‘outstanding’ job, and share prices recovered from an initial further dip on the announcement of his new position.
Recovery?
Having struck a 20-year distribution deal with respected pharmacy chain Walgreens in December, Valeant will have restored some investor confidence, and the 10% discount on dermatology and ophthalmology products Walgreen’s will offer to patients will be a welcome boost to public perception. Valeant says the deal could save the healthcare system as much as $600 million, and the company will be able to recoup sales lost when it severed ties with Philidor.
Pearson also said in December the company expects the FDA to approve three of its drugs this year. Its late-stage portfolio includes six ophthalmology products, as well as an allergy treatment and oral health drug, for all of which Valeant has set a launch target of 2016.
Until news of Pearson’s illness broke, stock prices had been recovering, and Valeant’s leadership were hopeful that they could steady the ship in 2016, paying off accumulated debts from previous transactions – including half of the Sprout fee – before returning to their policy of acquisition in 2017.
Time, and the results of the congressional hearings on the company’s pricing policy, and its internal investigation into the Philidor allegations, will determine if this will be possible.
Joel Levy
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