If you haven’t been following the ongoing saga of ‘Canadian’ drug company Valeant Pharmaceuticals, you probably aren’t alone. While news stories over the past year found their bombastic villain in pharma-bro Martin Shkreli (and fairly so), it could be argued that his price gouging model is based of Valeant.
For example, not too long ago it was reported that the company doubled the drug’s price of Seconal (or secobarbital by its generic name). This drug, which was developed in the 1930’s and went off patent in the early 90’s, is commonly used in physician-assisted suicide and is the drug of choice for this procedure. David Grube, a family doctor in Oregon, where physician-assisted death has been legal for 20 years, has stated that, “It works very quickly and very gently… People fall asleep with no complications. It’s a very gentle passing.”
Valeant bought Seconal last February (purchasing a portfolio of drugs from Marathon Pharmaceuticals) and immediately doubled the price to $3,000. In 2009 the price of a lethal dose of Seconal (100 capsules) was list than $200 US ($50 US in Denmark). It is speculated that this purchase was planned to coincide with physician assisted death in California’s “aid-in-dying law” taking effect this June; the company has now cornered the market on the over 80 year old drug. The CBC reports that, “other drugs included in the February 2015 Marathon acquisition were Isuprel and Nitropress, two life-saving heart drugs whose prices were tripled or increased six-fold.” According to The Wall Street Journal, the company raised the price of one heart drug by 525 and another by 212 percent on the very day it acquired the rights to the drugs.
Elizabeth Wallner, who was diagnosed with Stage 4 colon cancer five years ago that has spread to her liver and lungs, says , “She always thought that if her suffering became too unbearable, she would consider ending her life. But she never thought about the price tag of the lethal drug,” and, “she has one word to describe the pharmaceutical executive who decided to double the price of Seconal: ‘Scumbag.’ You’re going to make money off my death.”
While the barbituate, Seconal or Secobarbital, isn’t available in Canada, some physicians like Dr. Ellen Wiebe, said, “the orally administered drugs Secobarbital and Pentobarbital should be available in Canada at a reasonable cost… We have good drugs for the IV but we don’t have good drugs for the oral.” Putting aside the larger discussion around physician assisted death and the supreme court’s ruling, this story highlights a serious issue around pharmaceutical companies gouging patients and in this case those on their death beds. As drug prices continue to rise in Canada, we need a national and comprehensive strategy (universal pharmacare) to protect the Canadian public from the predatory actions of ‘big pharma’. Sadly, at a time when health economists say pharmacare could save up to $11 billion annually, when up to 1 in 5 Canadians can’t afford to fill their prescription and when Canada remains the only country with medicare that does not include pharmacare, the federal liberal government has recently vetoed a national pharmacare program.
Why The Valeant Pharmaceuticals Story Matters
While the media has reported extensively on ‘Pharma-Bro’ Martin S and Turing Pharmaceuticals AG’s greedy medication price hikes, what this ‘Canadian’ company Valeant does it no different. In fact it could be argued that the model Martin Shkreli was imitating was pioneered by Valeant Pharmacuetical (which business leaders, pension funds and banks in Canada championed) who were briefly the most valuable company in Canada. The New York Times stated that, “Lauded for a laserlike focus on shareholder returns, companies like Valeant Pharmaceuticals International, a multinational specialty drug company based in Quebec, received high marks and even higher valuations from besotted shareholders.” While the above story of jacking up prices of medication for dying patients is egregious and unconscionable, it is just the tip of the iceberg when it comes to the pharmaceutical industrial complex and the complicit role our government and institutions play in their operation.
A Very ‘Canadian’ Company
Valeant Pharmaceuticals was a relatively small specialty drug company before 2010, when it bought one of Canada’s largest drugmakers, Biovail As in aside, in 2008, the Securities and Exchange Commission sued Biovail for “repeatedly” overstating earnings and “actively” misleading investors. Biovail settled the case for $10 million. When Valeant merged with Toronto-based Biovail in 2010, it was specifically to keep Biovail’s tax structure. Valeant’s former chairman and chief executive is a London, Ontario native named Mike Pearson. Pearson was, “A consultant to big pharma for more than a decade before being tapped to run Valeant, he mostly shuns research and development and wholeheartedly embraces acquisitions of companies with proven products.”
Biovail was incorporated in Canada, but its main subsidiary (Biovail Laboratories International SRL) was based off-shore in Barbados which has rock bottom tax rates. The Financial post reports that, “The beauty of the Canadian system, unlike its U.S. counterpart, is its flexibility in allowing companies to shift their intellectual property centres to low-tax jurisdictions while repatriating the profits without incurring more tax. Biovail had mastered the ins and outs of international tax regimes and so has Valeant. The company has intellectual property located in Switzerland, Luxembourg, Barbados and Ireland, according to BMO. Some of its intellectual property was moved from Barbados to Bermuda in 2012 and company management insists it will continue to shift intellectual assets around in order to optimize taxes.” Other reports state that Valeant’s intellectual property also is owned in additional jurisdictions including Mexico, Poland, Canada, Australia and South Africa. This is despite Canada having one of the lowest corporate tax rates in the world (It should be pointed out that overall corporate Canada’s cash in tax haven countries has reached a new all-time high of $270 billion, so Valeant isn’t alone).
The New York Times reports that, “The move to Canada has been highly beneficial to Valeant, as detailed in a recent congressional report on the impact of the United States tax code on corporate activities. Published in July by the Senate Permanent Subcommittee on Investigations, the report found that by moving to Canada, Valeant lowered its statutory tax rate to 27 percent from 35 percent. But that barely captures the true scope of Valeant’s ability to escape taxes. Its actual cash tax rate is far lower, the report found. Valeant’s effective cash tax rate has fallen substantially, too, to 3.3 percent last year from 5.9 percent in 2010.” The result which Valeant admitted last year is having saved US$2.5-billion in taxes since 2010. Further, by playing the shell game and dodging taxes (similar US companies pay above 30% to Valeant’s 3%), it allows it to conduct an aggressive growth-by-acquisitions strategy.
Eugene Melnyk, the founder of Biovail, has alleged that, “Valeant Pharmaceuticals International Inc. is masquerading as a Canadian company to make use of this country’s international fiscal treaties and dodge U.S. taxes.”
As it stands, Valeant is incorporated in British Columbia and headquartered Laval, Quebec, where its head office employs 186 people. The corporate leadership of the company resides at Valeant’s U.S. headquarters in Bridgewater, N.J., where about 400 people are based. Only two of Valeant’s 10 board members live in Canada. The National Observer calls this trick, “inversion,” whereby American companies move their head offices to other countries to chop their tax bill (last month, Pfizer announced it was merging with an Ireland-based drug company for the same reason).
How ‘Canadian’ Valeant truly is remain a matter of perspective, but what is clear is the all too familiar story of the Canadian government allowing money to be stashed in off-shore tax havens. Assets officially held by Canadian corporations in the top ten havens are estimated at around $200 Billion in 2014, resulting in $7.8 billion in lost revenue. With the second lowest corporate tax rate in the G7, Canadian companies don’t need subsidiaries in tax havens to be competitive. At the same time the Canada Revenue Agency makes secret amnesty deals with at least 15 multi-millionaires who got caught with evasion. But, even more disturbingly Canada (unlike the United States) allows for companies to shift their intellectual property to lower-tax jurisdictions while repatriating the profits without incurring more tax, which is what Valeant is doing.
The Valeant Way
Valeant doesn’t develop drugs, they acquire them through mergers and acquisitions. They then raise the cost of drugs, slash research and development, and fire employees to make a huge profit. Since 2010, it has acquired companies with a total value of at least $36 billion, mostly in the United States. It is the sixth-largest acquirer, globally, by deal size (they now sit with an over $30-billion in debt burden but we`ll get to that later). At the same time, when Valeant acquired Medicis terminated 750 of 790 full-time employees, and when it acquired Bausch & Lomb it had 4,103 workers of which 3,000 were fired.
On top of the examples already cited in the introduction, prices for more than 30 of Valeant’s drugs and creams have risen massively since 2013 (as much as 2,288 per cent in one case) even though Valeant made no improvements to the drugs. (Valeant claims the price increases are justified because they did a study that concluded prices before were “substantially below their true value to hospitals and patients.”).
Valeant`s business model, as a writer from Forbes highlighted, relied almost, “exclusively on a Borg-like M&A strategy, acquiring companies with approved drugs it considered undervalued, obliterating the target companies’ operations and R&D, and then raising their drug prices almost immediately. A more cynical read of Valeant’s model is that the company was actually acquiring patients and treating them as commodities–like barrels of oil or cattle.“
The result is that at one point in 2014, “Valeant’s shares hit a staggering C$348 on the TSX, with its market value (the total value of all of its shares) making it the biggest company in all of Canada, worth C$111.6-billion at one point – larger than the Royal Bank of Canada. Canadian Business magazine even named Valeant’s boss, Michael Pearson, Canada’s CEO of the year.”
To put it another way, despite jacking up the prices on drugs to astronomical levels that patients desperately need, Canada`s business community championed `the Valeant way` and its CEO for their actions. Go figure….
*Ratio of R&D expenditures to sales revenue in Canada, 2013 and 2014
Nortel. Enron. Worldcom. Valeant?
Valeant’s business model is continuing to come under scrutiny and is proving to be unsustainable. The seedy saga has been ongoing and complicated. It would be too long to go into the full details here, but two articles worth reading are the matter are the National Observers, “Canada’s sleaziest corporate scandal,” and NY magazine’s, “Valeant Pharmaceuticals’ Novel Business Approach Made It a Wall Street Darling — Then a Pariah.”
Briefly, in September 2015, US Senator Bernie Sanders and Representative Elijah Cummings called for the House Oversight and Government Reform Committee to subpoena Valeant CEO J. Michael Pearson for testimony explaining why the cost of two commonly used heart drugs Isuprel and Nitropress were raised 525% and 212% respectively, after Valeant acquired them. This increased scrutiny from politicians and the media has not been good for Pearson or Valeant. From a high of $348 on the Toronto Stock Exchange, Valeant stock now hovers around $45 after months of steady decline. Pearson testified to the Senate Committee on Aging and admitted that the company had been “too aggressive” when it raised the prices of the two heart medications.
The company has also come under fire for its accounting practices where Valeant where it uses `cash earnings` which deviates from generally accepted accounting principal (GAAP). Macleans reported last year that, `Over the past five years, Valeant would have reported three annual losses, were it not for such adjustments.“ The Financial Post states that, “The risks of non-GAAP reporting are on the radar of Canadian securities regulators, who say that by omitting selected items companies can paint a more positive picture of financial performance,“ further that, “In 2013 the Ontario Securities Commission released a report after reviewing 50 companies that used non-GAAP reporting and said in 86 per cent of them staff identified concerns in their disclosures.“
Earlier this year, in regards to delays in filing annual financial, “Valeant Pharmaceuticals International Inc’s directors and key officers have received a cease-trade order by the securities regulator in the Canadian province of Quebec, on the company’s request, Valeant said on Thursday. In a separate statement, the Autorité Des Marches Financiers (AMF) said the order against trading shares takes effect Thursday and is in place for 15 days.“ The company is also incorporated in British Columbia, but it is not clear if a cease trade order was also sent in that province during the company`s financial reporting troubles.
Another issue (perhaps the largest one) began in the summer of 2015, the short-seller Andrew Left called the company’s finances a “fraud” because of the way it books revenue (the company is currently under investigation by the US Security and Exchange Commission (SEC)). The investigation is looking into Valeant’s practices with Philidor, an online pharmacy that it owned until this scandal broke (but did not adequately disclose its investors). Philidor employees were provided with instructions to alter prescription orders from doctors to provide the Valeant version of some drugs instead of the cheapest generic version available, boosting Valeant’s sales at the cost of patients and insurance plans. Further, left wrote that he believes, “the whole thing is a fraud to create invoices to deceive the auditors and book revenue… it is merely for the purpose of phantom sales or stuff the channel.” Channel stuffing is the practice of inflating manufacturing sales artificially by recording sales of goods that have been shipped but not actually sold to customers. For these reason Valeant has been called the ‘Pharmacuetical Enron’ by Left. There are also reports that, “a minor Slovenian pharma wholesaler PharmaSwiss was involved in significant part of the doubtful Valeant’s business, especially the so called channel stuffing.”
How Low Can Valeant Go
Valeant has cut its ties with Philidor and investigators are now trying to determine whether or not its practices with insurers were illegal. Pearson has stepped down as the CEO, a new CEO has been brought in, and billionaire notorious `activist hedge fund` manager Bill Ackman, who runs Pershing Square Capital Management, has joined the company’s board. According to Forbes, “the four major investors in Valeant—ValueAct, T. Rowe Price, Pershing Square Capital Management and Ruane Cunniff & Goldfarb, suffered a combined $3.66 billion in paper losses,“ since Valeants crash.
While many hedge funds have cut their losses and dumped their Valeant stocks, ValueAct and Pershing remain heavily involved in the company as it unrolls a PR campaign to win back investors and the public. Before he left, Pearson told the Senate Special Committee on Aging that Valeant, “was too aggressive in dramatically raising the prices of some of its drugs,” but that, “he thinks Valeant had been unfairly criticized in some respects,” while Ackman told the hearing the, “Company has learned ‘painful lessons’ over the past year.”
It an awkward attempt to quell the outrage of the public and politicians, and perhaps appear human, the company stated recently that all U.S. hospitals will be eligible for rebates of between 10 and 40 per cent based on volumes purchased for Nitropress and Isuprel (which the company had tripled the price for one drug and increased the other six-fold after acquiring them in 2015). As the Toronto Star reports, “No action was announced for two other drugs investigated by the Senate — Syprine and Cuprimine — used to treat rare genetic disorder Wilson’s disease. The 30-year-old drug, Syprine, was acquired by Valeant in 2010 and has since seen its price increased more than 3,000 per cent.”
The company was also slammed just last week for paying hefty retention bonuses to several executives, with that as much as $10.8 million will be handed out to three executives by the end of this year. STATnews stated, “the bonuses will be paid from revenues that were generated by taking huge price hikes on many drugs, which is what transformed the company into a poster child for corporate greed.”
While it is clear the company is horrible and morally corrupt, the sad part is it is not clear if they have broken any laws. Sure, they may be under investigation for channel stuffing, but the core practices they have used are legal. Tax havens, price gouging, and a long list of tactics are common practices not just of Valeant or Turing Pharmaceuticals, but Big Pharam as a whole. So, while we can be morally outraged at the company we should be equally irate at the governments and institutions that foster this arrangement.
