VRX - Valeant Pharmaceuticals International Inc.

[Liberty]

I'm going to disagree with this. Berkshire could have legally done an amazing range of very logical things to avoid taxes over the years, up to and including inverting into a tax haven or taking on lots of tax deductible debt. Berkshire has taken advantage of things like long term capital gains and renewable energy tax credits (which are meant to encourage the very investments Berkshire is making) but in general, has more than paid its fair share. It would be ridiculous to indict Berkshire on not paying taxes, relative to what it would have had available to it.

 

So yes, that's exactly where they draw the line. Where the hell else would they draw it?

 

That's exactly what I meant. There's a spectrum, and Malone is probably on one end, and old Yahoo is probably on the other, or something like that. Everybody seems to pick exactly where they are as the sweet spot, and anyone who's farther along than them is going too far. But many people (the media's full of that crap) are blaming Berkshire for minimizing their taxes in all kinds of ways while Buffett writes op-eds about taxes on the rich being too low.

 

I'm not saying Munger's wrong, just that him not considering an inversion doesn't mean that inversions are somehow morally wrong, or that Munger has picked exactly the right spot on the spectrum and that nobody should go farther. The US has attracted a lot of companies from other countries because it is/was more competitive in certain ares; now other countries are attracting companies from the US because the US isn't competitive in the area of corporate taxation for global businesses. Was it wrong when the US got foreign companies to move to it because it offered a better deal?

[Investor20]

Have not seen this posted in this thread.  Sorry if it is posted before

 

http://www.wsj.com/articles/meet-pharmas-newest-movers-and-shakers-1429750065

 

 

[rpadebet]

No. Just ignore me, i am just a short term distraction in this thread. :)

 

No offense frommi, you maybe really good at what you do, but the arguments you make on the short side have already been made last year.

 

VRX is a pretty big position for me (12%+) and I have been actively seeking downside arguments. All I hear until now border along "accusations and allegations" rather than based in fact. So I am inclined to keep my position at current levels until I see some fact based arguments or I myself see in the numbers that they are

 

-unable to keep the organic growth going (with or without price increases)

-unable to find new targets

-R&D strategy failing

-debt load not reduced

-Accounting becoming more aggressive

 

It was a surprise to see Munger come out on the other side, but even his arguments seem philosophical or qualitative. On the other hand, I also respect the analysis of Sequoia capital, ValueAct capital and Bill Ackman. These guys have been actively involved in this company with Sequoia and ValueAct having a major role in putting Mr.Pearson in place. Whatever people think of Bill Ackman, I am pretty sure he has a very good eye for aggressive accounting. His position size indicates his comfort level with this.

 

I am quite comfortable with my position currently.

 

[original mungerville]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

 

 

 

 

[tombgrt]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

I believe frommi is right in that sooner or later regulation will be needed to prevent even worse.

 

 

On your odds: Did you bet the farm if you are so sure about those odds? No sense in making this a 5-10% position if the expected value in a few years is easily $500-600.

 

 

[merkhet]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

I'm venturing way off topic at this point, but I would say that price hikes on medicine is a tiny bit different than price hikes on candy...

[wbr]

Ackman is up 50% in 3 months

 

According to this http://www.valuewalk.com/2015/04/pershing-square-investor-meeting/ Ackman's cost basis is actually $197. He bought all the way up and then some more when the company needed money for the Salix deal. He probably thinks he can get 20%+ IRR from here otherwise he would not be interested.

[wbr]

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

 

It's not like you die if you don't get your contact lenses. Most of Valeant's products are either for convenience ore aesthetics.

[rpadebet]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

I don't know whether munger dislikes the inversion, price increases or r&d strategy, but to me his opinion was based more along the lines of ......" I have seen such debt fueled roll ups before and they rarely succeed". I am just guessing, but based on his experience and his knowledge, he probably can see quite a few ways in which this can fail (along the lines of how he told Mr. Elon Musk about the 1000 different ways in which a electric car business could fail). This doesn't necessarily mean that VRX will fail though. He was probably making a statistical argument about debt funded roll ups.

 

 

 

 

 

[Liberty]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

I'm venturing way off topic at this point, but I would say that price hikes on medicine is a tiny bit different than price hikes on candy...

 

Yeah, the price of making candy is probably only going up with inflation, while the price of developing medicine is exploding.

 

But seriously, anything that has to do with medical treatment is a very sensitive topic. Everything should be free, right? But then, we wouldn't have anything much... Valeant has disclosed a lot about its pricing during the past year, and they don't focus much on pricing, they mostly grew through volume. But if you look at all their products, I'm sure you can find some like the one in that article that have gone up a lot; in this case, seems like they bought a product, and then rethought the pricing. That happens, sometimes there's untapped pricing power, just like sometimes prices fall through the floor when patents expire or a new better competing drug is introduced (but journalists don't write outraged articles about that).

 

I think the important thing is to keep a broad view of the industry, rather than look for headlines because "OMG, how can a vial of this drug cost thousands of dollars?". Well, how much did it cost to develop? How much value does the drug provide? It's still a market, with all the pros and cons that that implies.

 

Those who are worried about the high price of drugs should actually thank Valeant, because their lean approach is actually cutting a lot of waste. A lot of the price of drugs goes to pay for fat SG&A and unproductive R&D...

[tombgrt]

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

 

It's not like you die if you don't get your contact lenses. Most of Valeant's products are either for convenience ore aesthetics.

 

I'm not saying they do? Maybe my food analogy was a bit extreme but my point still stands. How do you compare candy with medicine? It's not all convenience or aesthetics right?

[rpadebet]

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

 

It's not like you die if you don't get your contact lenses. Most of Valeant's products are either for convenience ore aesthetics.

 

I'm not saying they do? Maybe my food analogy was a bit extreme but my point still stands. How do you compare candy with medicine? It's not all convenience or aesthetics right?

 

Raising prices in never popular with consumers and is never going to be. (unless you are AAPL that is, then you can raise your price 40%-50% and see sales also grow along those lines....  ;)).

 

An ethical argument can also be made against selling candy in a nation with high incidence of diabetes or sugary drinks such as coke. One could argue raising prices on such "harmful" products is even more ethically challenged than raising prices on medicines. :)

[giofranchi]

According to this http://www.valuewalk.com/2015/04/pershing-square-investor-meeting/ Ackman's cost basis is actually $197. He bought all the way up and then some more when the company needed money for the Salix deal. He probably thinks he can get 20%+ IRR from here otherwise he would not be interested.

 

+1! ;)

 

Gio

[original mungerville]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

I believe frommi is right in that sooner or later regulation will be needed to prevent even worse.

 

 

On your odds: Did you bet the farm if you are so sure about those odds? No sense in making this a 5-10% position if the expected value in a few years is easily $500-600.

 

I don't bet the farm on 80% odds with 20% chance of 50% drop. But, given 80% odds, I want major upside if I am right - so I bought the call LEAPS which provide me with substantial amount of the upside but protect the downside more than the stock.

 

Whether its truly 80% odds, I really don't know. I just don't want to pretend I am 100% certain this thing will more than double, so I say 80%. Without the huge debt load, the downside would probably be less than 50% - but that is not the case here.

[original mungerville]

I think either a problem happens with an acquisition or major product and with the high debt load, the stock falls by 50% thereafter OR

 

long investors make a shit load of money over the next few years.

 

I think the odds of the former are something like 10-20%, and the odds of the latter 80-90%.

 

Of course global macro issues impacting the debt and stock markets significantly could seriously impact the upside - but that could also make many developed world governments look insolvent and have other very serious side-effects, so these are not Valeant-specific problems, they are more general asset valuation issues which can be handled separately. All that to say, if the current muddle-through environment holds, in my view there is 80% chance this thing really does well.

 

Finally, the only thing to keep in mind re Munger is that he is quite involved with hospital administration, etc - I believe he sits on the board. He may not only dislike the tax inversions, but also the price hikes and maybe even the R&D cuts. Having said that, he and Buffett certainly did not mind raising prices at See's Candy every year - they keep gloating about it.

 

I don't know whether munger dislikes the inversion, price increases or r&d strategy, but to me his opinion was based more along the lines of ......" I have seen such debt fueled roll ups before and they rarely succeed". I am just guessing, but based on his experience and his knowledge, he probably can see quite a few ways in which this can fail (along the lines of how he told Mr. Elon Musk about the 1000 different ways in which a electric car business could fail). This doesn't necessarily mean that VRX will fail though. He was probably making a statistical argument about debt funded roll ups.

 

Ya, well if that is the case, he and I agree - that is why I like the LEAPS better than the stock.

[original mungerville]

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

 

It's not like you die if you don't get your contact lenses. Most of Valeant's products are either for convenience ore aesthetics.

 

I'm not saying they do? Maybe my food analogy was a bit extreme but my point still stands. How do you compare candy with medicine? It's not all convenience or aesthetics right?

 

Is this an ethics class? If it is, Liberty has already made some interesting arguments and I am not interested in debating whether raising prices on a suite of drugs in a larger portfolio is a sin or not. In any case, that is not Valeant's main business model driver. The main driver is cutting the shit out of research and making it, in their view, far more efficient.

[original mungerville]

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

 

It's not like you die if you don't get your contact lenses. Most of Valeant's products are either for convenience ore aesthetics.

 

I'm not saying they do? Maybe my food analogy was a bit extreme but my point still stands. How do you compare candy with medicine? It's not all convenience or aesthetics right?

 

Raising prices in never popular with consumers and is never going to be. (unless you are AAPL that is, then you can raise your price 40%-50% and see sales also grow along those lines....  ;)).

 

An ethical argument can also be made against selling candy in a nation with high incidence of diabetes or sugary drinks such as coke. One could argue raising prices on such "harmful" products is even more ethically challenged than raising prices on medicines. :)

 

Yes sugar is a killer. No, raising prices on sugar is actually beneficial to society as it should reduce demand - so by buying See's and raising prices, Buffett and Munger are doing a societal good. When the expanded sales volume, however, they were doing societal harm. But if we are going to debate ethics re Valeant, the key thing is to debate slashing R&D and maybe tax inversion. Other than that, debating about a tangential component of them running their business like raising prices on what they view as underpriced drugs is not the best use of our time.

[Liberty]

I think one of the main fallacies that Valeant has to fight is that people have the mistaken belief that $1 of R&D equals $1 of R&D anywhere. That's BS.

 

Historically, Apple spends a small % of revenue in R&D compared to many other tech companies. Some tiny biotech startups found billion dollar drugs while some of the largest pharmas in the world struggle to discover new things. Two labs that have the exact same budget could be night and day when it comes to productivity and talent.

 

What matters is how smartly you do the research and the results, not how much money you pour down that hole...

 

For example, Valeant keeps a smaller R&D staff and outsources a lot of R&D to external labs that have overcapacity, so they pay a lot less to do the exact same thing (they get the marginal cost and don't have to pay the fixed costs when a project is over). This reduces the dollar amount, but not necessarily the results, yep people who short-hand it to just a dollar amount would say that this is bad.

[tombgrt]

 

What? The difference being that people don't need the candy but sure as hell need the medicine and have no alternative. In some cases it's simply legal robbery. I find it odd that some people have a problem with investing in gambling or cigarettes companies but don't seem to think twice about the ethical aspects when investing in VRX.

In fact, with gambling and cigarettes you at least have an initial choice on whether you want to participate or not and most people are able to keep it under control even when they do decide to gamble or smoke. Often there is no such choice for patients that need a certain medicine. How would people like it if they could only buy food at their local mall that was marked up 10000%?

 

 

It's not like you die if you don't get your contact lenses. Most of Valeant's products are either for convenience ore aesthetics.

 

I'm not saying they do? Maybe my food analogy was a bit extreme but my point still stands. How do you compare candy with medicine? It's not all convenience or aesthetics right?

 

Raising prices in never popular with consumers and is never going to be. (unless you are AAPL that is, then you can raise your price 40%-50% and see sales also grow along those lines....  ;)).

 

An ethical argument can also be made against selling candy in a nation with high incidence of diabetes or sugary drinks such as coke. One could argue raising prices on such "harmful" products is even more ethically challenged than raising prices on medicines. :)

 

I don't see how raising the price of say heart saving drugs by 515% in a day (as the WSJ put it) comes near raising prices on candy on a gradual basis. Actually, raising prices on candy should actually temper enthusiasm somewhat for the product. Sadly, medicine doesn't have that price sensitivity... Simply bad luck for those that need it?

 

Of course there is untapped pricing power like Liberty put it. That doesn't automatically mean they should use it. Don't get me wrong, I don't have any beef with VRX holders here or even the company itself. They use the methods they have in the legal framework that currently exists, hard to blame them. And I own companies like Intralot and AIQ so I'm no saint.

Just think these ethical questions have to be asked. Is there a line that should be drawn for the price of branded drugs? If so where should it lie? The same questions (less urgently and in lesser degree imo) apply for candy and beverage companies... Buffett and Munger aren't saints either, that's for sure! And you can't expect those companies to add their own moral compass, just like you can't expect Buffett to simply pay more taxes even if he asks for them in columns and annual letters!

 

[merkhet]

I'm venturing way off topic at this point, but I would say that price hikes on medicine is a tiny bit different than price hikes on candy...

 

Yeah, the price of making candy is probably only going up with inflation, while the price of developing medicine is exploding.

 

But seriously, anything that has to do with medical treatment is a very sensitive topic. Everything should be free, right? But then, we wouldn't have anything much... Valeant has disclosed a lot about its pricing during the past year, and they don't focus much on pricing, they mostly grew through volume. But if you look at all their products, I'm sure you can find some like the one in that article that have gone up a lot; in this case, seems like they bought a product, and then rethought the pricing. That happens, sometimes there's untapped pricing power, just like sometimes prices fall through the floor when patents expire or a new better competing drug is introduced (but journalists don't write outraged articles about that).

 

I think the important thing is to keep a broad view of the industry, rather than look for headlines because "OMG, how can a vial of this drug cost thousands of dollars?". Well, how much did it cost to develop? How much value does the drug provide? It's still a market, with all the pros and cons that that implies.

 

Those who are worried about the high price of drugs should actually thank Valeant, because their lean approach is actually cutting a lot of waste. A lot of the price of drugs goes to pay for fat SG&A and unproductive R&D...

 

"Never wrestle in the mud with a pig. You'll both get dirty, but the pig will enjoy it."

"Never argue with a (retired) lawyer. You'll both get frustrated, but the (retired) lawyer will enjoy it."

 

:)

 

So, venturing off topic some more, if your argument is that it the cost of developing medicine is exploding, then since Valeant slashes R&D and doesn't actually do much development at all, shouldn't that price go down? :P

 

In any case, I don't think anyone is arguing that Valeant (or any other drug manufacturer) should be doing its work for free. My comment was merely to point out that there are significant situational differences between raising prices on candy and raising prices on medicine -- people can come out differently in terms of deciding on the morality of one or the other, but it would take some tortured logic to say that the situations present no differences.

[Liberty]

Tom, how do you know if the drug was too expensive after the price hike rather than not expensive enough before? How do we find the right price? Is lower always better?

 

Maybe people with certain diseases are best served over time if there's a profitable drug for their condition that attracts more other companies and generic makers. If there's just one low-profit or unprofitable drug, they probably won't get new better drugs over time, and generic makers probably won't rush to make generics when patents expire.

 

I don't know if it's the case in this particular situation, but I know that short-termism isn't just bad for stocks. Some people might prefer lower prices today, but maybe many more people would be helped with more interest in that therapeutic area. There's a balance somewhere between these tradeoffs. I don't pretend to have the anwer, but I know it's not as simple as "any price increase is bad".

[original mungerville]

I'm venturing way off topic at this point, but I would say that price hikes on medicine is a tiny bit different than price hikes on candy...

 

Yeah, the price of making candy is probably only going up with inflation, while the price of developing medicine is exploding.

 

But seriously, anything that has to do with medical treatment is a very sensitive topic. Everything should be free, right? But then, we wouldn't have anything much... Valeant has disclosed a lot about its pricing during the past year, and they don't focus much on pricing, they mostly grew through volume. But if you look at all their products, I'm sure you can find some like the one in that article that have gone up a lot; in this case, seems like they bought a product, and then rethought the pricing. That happens, sometimes there's untapped pricing power, just like sometimes prices fall through the floor when patents expire or a new better competing drug is introduced (but journalists don't write outraged articles about that).

 

I think the important thing is to keep a broad view of the industry, rather than look for headlines because "OMG, how can a vial of this drug cost thousands of dollars?". Well, how much did it cost to develop? How much value does the drug provide? It's still a market, with all the pros and cons that that implies.

 

Those who are worried about the high price of drugs should actually thank Valeant, because their lean approach is actually cutting a lot of waste. A lot of the price of drugs goes to pay for fat SG&A and unproductive R&D...

 

"Never wrestle in the mud with a pig. You'll both get dirty, but the pig will enjoy it."

"Never argue with a (retired) lawyer. You'll both get frustrated, but the (retired) lawyer will enjoy it."

 

:)

 

So, venturing off topic some more, if your argument is that it the cost of developing medicine is exploding, then since Valeant slashes R&D and doesn't actually do much development at all, shouldn't that price go down? :P

 

In any case, I don't think anyone is arguing that Valeant (or any other drug manufacturer) should be doing its work for free. My comment was merely to point out that there are significant situational differences between raising prices on candy and raising prices on medicine -- people can come out differently in terms of deciding on the morality of one or the other, but it would take some tortured logic to say that the situations present no differences.

 

Are you saying if you are in the drug business, you should never raise prices on certain under-priced drugs in your portfolio? Or just raise them incrementally over time? Or better than that, reduce prices for societal benefit?

 

Now I know you are not saying this, but this discussion is not that relevant to Valeant as its not the core differentiator in their business model - slashing R&D and maybe tax inversion are though.

[Liberty]

I'm venturing way off topic at this point, but I would say that price hikes on medicine is a tiny bit different than price hikes on candy...

 

Yeah, the price of making candy is probably only going up with inflation, while the price of developing medicine is exploding.

 

But seriously, anything that has to do with medical treatment is a very sensitive topic. Everything should be free, right? But then, we wouldn't have anything much... Valeant has disclosed a lot about its pricing during the past year, and they don't focus much on pricing, they mostly grew through volume. But if you look at all their products, I'm sure you can find some like the one in that article that have gone up a lot; in this case, seems like they bought a product, and then rethought the pricing. That happens, sometimes there's untapped pricing power, just like sometimes prices fall through the floor when patents expire or a new better competing drug is introduced (but journalists don't write outraged articles about that).

 

I think the important thing is to keep a broad view of the industry, rather than look for headlines because "OMG, how can a vial of this drug cost thousands of dollars?". Well, how much did it cost to develop? How much value does the drug provide? It's still a market, with all the pros and cons that that implies.

 

Those who are worried about the high price of drugs should actually thank Valeant, because their lean approach is actually cutting a lot of waste. A lot of the price of drugs goes to pay for fat SG&A and unproductive R&D...

 

"Never wrestle in the mud with a pig. You'll both get dirty, but the pig will enjoy it."

"Never argue with a (retired) lawyer. You'll both get frustrated, but the (retired) lawyer will enjoy it."

 

:)

 

So, venturing off topic some more, if your argument is that it the cost of developing medicine is exploding, then since Valeant slashes R&D and doesn't actually do much development at all, shouldn't that price go down? :P

 

In any case, I don't think anyone is arguing that Valeant (or any other drug manufacturer) should be doing its work for free. My comment was merely to point out that there are significant situational differences between raising prices on candy and raising prices on medicine -- people can come out differently in terms of deciding on the morality of one or the other, but it would take some tortured logic to say that the situations present no differences.

 

Valeant didn't develop that drug, they bought it, and then repriced it. For the vast majority of their portfolio, they don't seem to take more pricing than other pharmas. In fact, a lot of what they sell is OTC or branded generics, and they don't have too much pricing power.

 

It's also not true that Valeant doesn't do R&D. Look at their pipeline and product launches, they have lots of new products. They just do it in a different way and focus on different things than the traditional model in the industry.

 

I didn't say there was no difference between candies and drugs, btw. Just tried to explain that it was more complex than "higher prices = bad".

[wbr]

I don't see how raising the price of say heart saving drugs by 515% in a day (as the WSJ put it) comes near raising prices on candy on a gradual basis. Actually, raising prices on candy should actually temper enthusiasm somewhat for the product. Sadly, medicine doesn't have that price sensitivity... Simply bad luck for those that need it?

 

Of course there is untapped pricing power like Liberty put it. That doesn't automatically mean they should use it. Don't get me wrong, I don't have any beef with VRX holders here or even the company itself. They use the methods they have in the legal framework that currently exists, hard to blame them. And I own companies like Intralot and AIQ so I'm no saint.

Just think these ethical questions have to be asked. Is there a line that should be drawn for the price of branded drugs? If so where should it lie? The same questions (less urgently and in lesser degree imo) apply for candy and beverage companies... Buffett and Munger aren't saints either, that's for sure! And you can't expect those companies to add their own moral compass, just like you can't expect Buffett to simply pay more taxes even if he asks for them in columns and annual letters!

 

I think that is very well put. Every investor has to ask those questions and decide for himself. You can probably find something bad in every company (pollution, underpaid labour, unhealthy products...). 

[merkhet]

Okay, since it's a slow morning for me, we'll do this the lawyer way. Line by excruciating line.

 

Are you saying if you are in the drug business, you should never raise prices on certain under-priced drugs in your portfolio?

 

No. I merely said that there are situational differences between raising prices on candy and raising prices on medicine. You presented an argument that the two were the same. I pushed back against that.

 

Or just raise them incrementally over time? Or better than that, reduce prices for societal benefit?

 

I suppose you could do that if you really wanted to. I didn't present either of those as options. I merely said that there are situational differences between raising prices on candy and raising prices on medicine. You presented an argument that the two were the same. I pushed back against that.

 

Notice how I have repeated myself because, for some reason, I think this is getting lost in translation somewhere.

 

Now I know you are not saying this, but this discussion is not that relevant to Valeant as its not the core differentiator in their business model - slashing R&D and maybe tax inversion are though.

 

I didn't say it was relevant to Valeant. In fact, I said that I was venturing off-topic to respond to a comment from you that also seemed off-topic in presenting the raising of prices on candy as the same as the raising of prices on medicine.

 

Valeant didn't develop that drug, they bought it, and then repriced it. For the vast majority of their portfolio, they don't seem to take more pricing than other pharmas. In fact, a lot of what they sell is OTC or branded generics, and they don't have too much pricing power.

 

My comment wasn't whether Valeant's pricing was morally correct and/or out of line with other pharmaceutical companies. My comment was merely that there are varied considerations when it comes to raising prices on medicine versus raising prices on candy. Something that I thought was rather obvious, but multiple posts later, I am beginning to doubt its obviousness to other people.

 

It's also not true that Valeant doesn't do R&D. Look at their pipeline and product launches, they have lots of new products. They just do it in a different way and focus on different things than the traditional model in the industry.

 

I said they don't do much R&D. Not that they don't do R&D. Though in order to continue this conversation, if you want to do that, we'd have to agree on how we would measure that. Input/output/patents/etc.

 

I didn't say there was no difference between candies and drugs, btw. Just tried to explain that it was more complex than "higher prices = bad".

 

My comment about that wasn't aimed at you. :) Also, I didn't say that "higher prices = bad." I'm pretty sure that at no point in this discussion have I made a moral argument for or against either raising or lowering prices for candy or medicine. I have only pointed out that candy != medicine.