MONTREAL — Valeant Pharmaceuticals International Inc. said Monday it will refocus its model away from purchasing mispriced drugs — a segment that accounts for only a small part of its overall business — following a storm of controversy that has culminated in subpoenas from U.S. prosecutors seeking details on the company's pricing and distribution practices.
“It is likely we will pursue fewer if any transactions that are focused on mispriced products,” CEO Michael Pearson said during a call Monday to discuss the Laval, Que.-based company's third quarter earnings.
The company said during the next 12 months it will consider selling, spinning off or privatizing its neurology and “other” drug category business in which much of the mispriced buying occurs.
“Given the current environment, I think that probably doesn't make sense for us to hold onto it,” said Pearson. Evercore ISI analyst Umer Raffat said because this represents only about 10 per cent of revenues and for the vast majority of price increases, this potential divestment does not change his outlook on the company.
“If you take out neuro and ‘other,' which they may potentially divest, it actually makes the volume-price even lesser to the overall business,” Raffat said. “It's not a big part of their business, and that's the most important thing.”
Valeant shares fell 6.31 per cent to close at $213.05 in Toronto. The stock has dropped more than 33 per cent since Sept. 21, when Democratic presidential hopeful Hillary Clinton tweeted her intent to tackle high prices in some drug markets. But Raffat said the slide has had more to do with who owns the stock than the company's fundamentals.
“I think their shareholder base is very fast money, and that's partially why you see moves like this in the stock,” he said.
Pearson said that while he does not believe the company has been unfairly raising prices on acquired medications, the controversy is drawing attention away from the strong organic growth in other sectors of the business.
“The prices that we took when there were mispriced assets were appropriate, but the field is very large and we'll just be pragmatic. Why focus on areas of the business that will just focus on a lot of media stir” said Pearson.
“We have always believed that any company's strategy must be agile and flexible in order to navigate in an ever-changing world.”
The company revealed last week that U.S. Attorney's offices in Massachusetts and New York had received court orders forcing it to turn over documents tied to the U.S. price hikes of two heart drugs.
In the U.S., prices for Nitropress and Isuprel increased by 212 per cent and 525 per cent after company acquired the rights to sell them.
“In terms of our acquisitions … only very few of them were ones where we thought that assets were mispriced, where they actually were not being priced at the value they delivered to the health care system,” Pearson said.
“If people are not able to price products, it's not good for long-term markets because then you will not get competitors in.”
Pearson said Valeant's counsel is in touch with the U.S. government and intends to co-operate with the investigations. But he added the company would not be providing further information or comment to the public.
Valeant has long had to answer to concerns regarding the sustainability of a business model that relies heavily on acquiring other companies with drugs in the pipeline without investing a significant portion of its own capital into research and development.
Pearson he said it was too early to comment on how much the company may increase research spending in relation to revenues, but at the moment the company spends about $100 million a year on R&D.
“It would certainly continue to be well below that of most of our competitors that do R&D in the traditional way because I think what we've proven to ourselves is that our non-traditional R&D approach is highly productive with very strong returns on investment,” he said.
Meanwhile, Valeant said 2015 is shaping up to be more profitable than its previous estimates.
The company is now projecting at least US$11.67 and as much as US$11.87 per share of cash earnings for the full year, up from the previous range of between US$11.50 and US$11.80 per share.
Valeant announced US$2.74 per share of cash earnings in the third quarter, up 30 per cent from US$2.11 in the same time last year, with US$2.786 billion of revenue, above consensus estimates of US$2.779 billion.