VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Though Valeant is very much criticized, it doesn’t seem to be alone…

 

http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html?ref=business&smid=tw-nytimesbusiness&smtyp=cur&_r=0

 

Cheers,

 

Gio

 

[adesigar]

Though Valeant is very much criticized, it doesn’t seem to be alone…

 

http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html?ref=business&smid=tw-nytimesbusiness&smtyp=cur&_r=0

 

Cheers,

 

Gio

 

What I find incomprehensible is American companies develop drugs that they sell much cheaper in other countries while they rob their own countrymen/women.  Even more difficult to understand are the people defending/protecting them.

[giofranchi]

Even more difficult to understand are the people defending/protecting them.

 

Imo you sell drugs for whatever the market is willing to pay. Exactly the way you sell everything else. Period.

 

Cheers,

 

Gio

 

[giofranchi]

A common theme about these increases in price is they happen to drugs after they have been bought. Evidently someone recognized a drug that is overlooked and underappreciated, which therefore sells far below comparable products, and buys it exactly because he/she excepts the market might be willing to pay much more for that drug.

Would you then expect him/her not to raise its price? If he/she couldn’t raise its price, he/she wouldn’t have bought the drug in the first place…

 

Cheers,

 

Gio

 

[Jurgis]

Though Valeant is very much criticized, it doesn’t seem to be alone…

 

http://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html?ref=business&smid=tw-nytimesbusiness&smtyp=cur&_r=0

 

Cheers,

 

Gio

 

What I find incomprehensible is American companies develop drugs that they sell much cheaper in other countries while they rob their own countrymen/women.  Even more difficult to understand are the people defending/protecting them.

 

+1

[LC]

Even more difficult to understand are the people defending/protecting them.

 

Imo you sell drugs for whatever the market is willing to pay. Exactly the way you sell everything else. Period.

 

Cheers,

 

Gio

 

There's a balancing act between ethics and economics. You could justify charging almost anything for a drug which treats an ultra-rare life-threatening disease.

[frommi]

There's a balancing act between ethics and economics. You could justify charging almost anything for a drug which treats an ultra-rare life-threatening disease.

 

So you like it when people die because they don`t have enough money?  ;)

 

[giofranchi]

There's a balancing act between ethics and economics. You could justify charging almost anything for a drug which treats an ultra-rare life-threatening disease.

 

Ok, let’s say I think 90% of the price increase could be justified by the fact that drug was overlooked and was selling far below comparable products in the first place… The remaining 10% could be unnecessary and condemnable greed...

 

Cheers,

 

Gio

 

[Jurgis]

There's a balancing act between ethics and economics. You could justify charging almost anything for a drug which treats an ultra-rare life-threatening disease.

 

So you like it when people die because they don`t have enough money?  ;)

 

I read LC as saying that companies should balance ethics and economics rather that he approved "charging almost anything for a drug..."

 

I'll delete my interpretation if LC responds himself. :)

[LC]

There's a balancing act between ethics and economics. You could justify charging almost anything for a drug which treats an ultra-rare life-threatening disease.

 

So you like it when people die because they don`t have enough money?  ;)

 

I read LC as saying that companies should balance ethics and economics rather that he approved "charging almost anything for a drug..."

 

I'll delete my interpretation if LC responds himself. :)

 

That is exactly what I meant! I have a heart! Sometimes I think too much for this profession  ;D

 

 

[LC]

There's a balancing act between ethics and economics. You could justify charging almost anything for a drug which treats an ultra-rare life-threatening disease.

 

Ok, let’s say I think 90% of the price increase could be justified by the fact that drug was overlooked and was selling far below comparable products in the first place… The remaining 10% could be unnecessary and condemnable greed...

 

Cheers,

 

Gio

 

Totally fair and I don't profess to know where that line is. I was just commenting on what happens when you take a purely economic justification to the extreme. Many times and in many industries do managers overlook human ethics to make another dollar. I want to avoid being a shareholder of those people. That's a general statement, I don't know where VRX falls in this discussion. For all I know they are a giant shade of gray selling both life-saving generics for pennies and a few rare drugs for millions.

[Picasso]

It seems like the common element in these price hikes are the involvement of hedge fund/finance/consultants who see a form of arbitrage and take advantage of it. 

 

Bulls of VRX have stated the low ROIC on R&D spend as a reason why the VRX model is a good one.  You just need several players focused on "better" R&D and voila you reap better returns.  I've always thought low ROIC on R&D and high drug prices just went hand in hand.  If there were tons of returns to be reaped then other players could bring down costs and it would eventually balance out.

 

Most of these price hikes are also ahead of a patent cliff or there's some short-term strategy to divert a maximum amount of cash flows over a very short period of time.  It's obviously kind of crappy but I think it's hard to know the full story.  They can't keep those prices that high forever so the financial attractiveness at the expense of ruining the brand (Valeant, Turing, whatever) seems dubious.

 

I am beginning to think that anyone without deep pharma experience does not have the ability to properly assess these businesses.  Myself included.

[Liberty]

I think the selloff in VRX is way overdone and basically based on media perception more than anything else. The trying-to-save-their-skins-so-ready-to-do-anything management at the old Allergan claimed that Valeant was only growing based on pricing (based on bad data and cherry picking) and that obviously partly stuck, as well as some of the stories about things like the Marathon deal, but VRX isn't some biotech relying on a few super expensive products that they need to raise prices on. It takes some price when it can like everybody else, and sometimes they'll do opportunistic deals for mispriced drugs (but they don't have to do those), but I don't feel they're particularly vulnerable here.

 

Management was recently discussing this:

 

Outside the US, very little pricing that we're getting. About negative 1%. Only place you can rise prices is OTC, but that's tough too. Inside the US, we have 4-5 key business segments. Lots of contracts with managed care. In derm for example, contractually we get about 5%/year. Contact lenses, it's market based, but we're trying to gain market share right now so not much price. It's like an OTC.

 

When we buy new products, if we find they've been mispriced, we'll sometimes do a one-time price increase. For example with Marathon, they had a product that was way lower than competition. Didn't make sense. We raised priced, sales didn't go down. This creates shareholder value because if we paid 2x sale, in reality price was lower because they were leaving money on the table. Sometimes this happens because a product is too small for a big company, and they lose track of pricing.

 

We've been accused of raising price, but our organic growth is more volume-based than price-based, and will continue to be.

 

I don't remember if they discussed it there too or somewhere else, but basically I recall Pearson saying that Marathon told them that the drugs were mispriced, and that they couldn't raise prices themselves for some reason (I don't remember, some conflict with a more important part of their business maybe?). I also recall something about those drugs being more effective than competing drugs despite being priced way lower, so what Valeant did is basically raise price (they hired consultants who specialize in that to price it, they didn't price it themselves) to the existing market price set by others and sales didn't go down. If they had overpriced them, sales would have gone down as other competing drugs would've been substituted, no?

 

It's like you're Honda and one day you wake up and realize you're selling your Civic for $10k while Toyota is selling its Corolla for $20k, so you match their price, and the headlines all read: "Honda price gouging, doubles price of car".

 

It's always a sensitive conversation when it's about people's health. I think the obvious solution is to have non-discretionary drugs be covered either by insurance or by some form of government insurance. If you want a minor cosmetic procedure, that's another story. But life-saving drugs should be covered. Otherwise any price is always too high for some people, and low prices are often too low for a vibrant drug discovery ecosystem.

 

The debate about prices is hard because prices can always be lower until they're zero. But lower prices, especially for drugs that cover rare diseases where there's not a lot of competing drugs and not a lot of patients (so no economies of scale -- can't spread cost of drug over many patients so high cost per dose -- and not many alternatives for patients), will sometimes just lead to drugs not being developed in the first place, or for small biotechs not to be acquired by bigger players who can commercialize a drug (VRX's favorite approach -- those who say they don't do R&D forget that they buy a lot of R&D, they just reduce uncertainty).

 

These sins of omission - a drug never being created - are less visible, but they are just as bad as people not getting a drug because it's too expensive.

 

So you're not really helping people if the drugs don't get made... You can legislate low prices today, and that'll be great for a few years as we run through existing stuff and late pipeline, but that's short-sighted and probably more people will suffer and die in the long-term than with more market-set prices. In other words, allocating capital to drugs is probably better done by some form of market mechanism than by legislation. But then once the drugs are made, the non-discretionary ones should be covered so that those who need them get them.

[Picasso]

Oh yeah, agreed on the price reaction assuming that is 100% why VRX was down 8%.  But it also does highlight the size and spotlight VRX is under when trying to find deals that work.  I'm pretty sure every drug they raise prices from now on will be thrown all over the front page of CNBC and the NYT.  Probably not the best environment for VRX to do this during an election cycle.

 

This is also a hedge fund hotel and I'm sure risk management comes into play with those guys.  I have a feeling that most of the hot potato hedge funds know very little about VRX (aside from Ackman or ValueAct) which may explain the volatility of late.

[adesigar]

It's like you're Honda and one day you wake up and realize you're selling your Civic for $10k while Toyota is selling its Corolla for $20k, so you match their price, and the headlines all read: "Honda price gouging, doubles price of car".

 

The comparison in the article that was linked would be.

 

You wake up one morning and realize that Toyota stopped selling Corollas so you can price the Civic at $500,000 and people have to pay (or they die). At the same time the Civic is still being sold for $10,000 or less in every other country because the governments of those countries said price it for 10,000 or we will let our companies copy your design. So you gouge the only people you can which happen to be the citizens of your own country. Finally there are people in your own country who will defend these actions citing capitalism/efficient markets and other such crap.

 

Im not against the companies making profits on life saving drugs. They should make money and they should make a lot of since they are saving lives. There is however a difference between making money and robbing the helpless. If you think price increases from $1->$13.50->$750,  500->10,800,  $20->$1850 are just companies fixing mispricing I have a bridge to sell you.

 

 

[Guest Grey512]

adesigar,

 

This is quite thought-provoking.. It reminds me of an old interview with Guy Spier. When asked about whether he invests in healthcare, he said that he does not because healthcare has a fundamental tension between the profit motive on one hand, and the 'good' of the population on another. His only exception to his 'no healthcare' rule was dialysis companies - he thought that dialysis companies make money without negatively impacting the sick.

 

Companies like VRX / Gilead are probably playing 'too close to the line' on this whole thing, hence your (and my) discomfort.

[Bagehot]

It's like you're Honda and one day you wake up and realize you're selling your Civic for $10k while Toyota is selling its Corolla for $20k, so you match their price, and the headlines all read: "Honda price gouging, doubles price of car".

 

The comparison in the article that was linked would be.

 

You wake up one morning and realize that Toyota stopped selling Corollas so you can price the Civic at $500,000 and people have to pay (or they die). At the same time the Civic is still being sold for $10,000 or less in every other country because the governments of those countries said price it for 10,000 or we will let our companies copy your design. So you gouge the only people you can which happen to be the citizens of your own country. Finally there are people in your own country who will defend these actions citing capitalism/efficient markets and other such crap.

 

Im not against the companies making profits on life saving drugs. They should make money and they should make a lot of since they are saving lives. There is however a difference between making money and robbing the helpless. If you think price increases from $1->$13.50->$750,  500->10,800,  $20->$1850 are just companies fixing mispricing I have a bridge to sell you.

 

A couple of things to note: 

 

-Prescription drugs make up only 10% of US annual HC spend, so there really isn't much leverage in reducing aggregate healthcare spending via pharma price controls

-I don't know much about other "egregious offenders" but VRX is explicitly designed to avoid significant reimbursement risk; Schiller mentioned in the Q&A of his testimony to the Permanent Subcommittee on Investigations that Medicaid and Medicare make up <5% of VRX sales (and I'm sure a lower percentage of profits)

-For drugs that aren't being paid for by MDCR/MDCD (ie the other ~95% of VRX's sales) it is hard to imagine the govt intervening in contracting decisions among private parties (drug cos and PBMs/Managed Care providers)

[Liberty]

It's like you're Honda and one day you wake up and realize you're selling your Civic for $10k while Toyota is selling its Corolla for $20k, so you match their price, and the headlines all read: "Honda price gouging, doubles price of car".

 

The comparison in the article that was linked would be.

 

You wake up one morning and realize that Toyota stopped selling Corollas so you can price the Civic at $500,000 and people have to pay (or they die). At the same time the Civic is still being sold for $10,000 or less in every other country because the governments of those countries said price it for 10,000 or we will let our companies copy your design. So you gouge the only people you can which happen to be the citizens of your own country. Finally there are people in your own country who will defend these actions citing capitalism/efficient markets and other such crap.

 

Im not against the companies making profits on life saving drugs. They should make money and they should make a lot of since they are saving lives. There is however a difference between making money and robbing the helpless. If you think price increases from $1->$13.50->$750,  500->10,800,  $20->$1850 are just companies fixing mispricing I have a bridge to sell you.

 

I was talking about the Marathon drugs. There were competing drugs and they raised prices to that level. I'm less familiar with the other drugs.

 

Having a monopoly certainly brings a lot more power, and that should be balanced by another force (regulator in this case). I also said that I thought non-discretionary drugs shouldn't be covered directly by people, so everyone who needs them should get them.

 

In a lot of these discussions there's an undercurrent that "expensive = wrong", and I think that's oversimplifying it. If you save someone's life, how much is that worth? If you avoid hundreds of thousands of dollars in hospital/doctor costs with a drug, how much is that worth? Can you price for some of that value, or should all the value of your work accrue to others? If you are doing R&D into rare diseases (with few patients to spread the cost over) and most of your research leads nowhere, should you be able to price the winners so they help pay for the losers or should they be priced based on the COGS of the pills themselves without taking into account overall R&D required and risk taken to get there?

 

Also, when the price of something goes up a lot, people anchor on the lower price, but if the price had always been the higher one from the start, would that make it ok? I'm sure there are tons of expensive drugs and procedures that started expensive and we're not reading about in the paper because there wasn't a price change. Heck, if they start super-expensive and reduce prices a bit every year, maybe they'd get a positive article written even if the cumulative cost ends up being higher for the same benefit as some of the maligned drugs.

 

I'm sure there are abuses, though, and they should be stopped. I'm just not sure what's a good system to do that that doesn't have unforeseen consequences. I'm sure we can improve on how things are, but I get a feeling that a lot of what is in the media is there more for shock value than to elucidate what the real ins and outs of the situation are. I tend to care more about how effective the system is in aggregate. When you optimize for edge cases, you sometimes cause more damage by making less effective the part of the system that covers 99% of people. That's why I like having the safety net to catch edge cases (non-discretionary drugs reimbursed) rather than try to go at it from the other end and control prices with a heavy hand.

 

If we look at things as a whole, some drugs go up in prices, and others that are worth billions annually in revenue go generic and become much cheaper. On the net is the system effective? I often think that the FDA is too conservative and that they over-emphasize avoiding sins of commission over sins of omission (which also raises prices) simply because those are more visible and career threatening despite having just as big an impact on people, but that's a different debate...

 

I'm just worried that the risk-reward equation for researching drugs for rare diseases becomes very different if you use a heavy hand to keep a lid on prices. A lot might never be developed, and the successful ones probably cross-subsidize a lot of the failed ones (and before someone says that VRX doesn't do that kind of research, remember that when they buy an asset from a small biotech, if you follow the money, it still goes to those who do R&D and finances the next pipeline round).

 

Don't get me wrong. I know there's a crapload of inefficiency in the healthcare system and that makes prices higher for everyone. I just think we should be careful about getting a Robin Hood tunnel vision on certain things and not taking into account unforeseen consequences, and that if we want to make a difference, there are billions and billions of inefficiencies (too much bureaucracy, inefficient paper-based systems, not allowing nurses to do more basic procedures without doctors, not cutting down on unnecessary procedures, not favoring disease prevention, etc) that could be worked on without much downside and these could pay thousands of times over for all the rare-diseases drugs out there.

[Bagehot]

adesigar,

 

This is quite thought-provoking.. It reminds me of an old interview with Guy Spier. When asked about whether he invests in healthcare, he said that he does not because healthcare has a fundamental tension between the profit motive on one hand, and the 'good' of the population on another. His only exception to his 'no healthcare' rule was dialysis companies - he thought that dialysis companies make money without negatively impacting the sick.

 

Companies like VRX / Gilead are probably playing 'too close to the line' on this whole thing, hence your (and my) discomfort.

 

DVA makes negative profits on MDCR patients (~90% of dialysis patients) and has paid almost $1B in fines in the past year.

 

http://www.denverpost.com/news/ci_26780485/davita-pay-389-million-settle-anti-kickback-investigations

http://www.denverpost.com/business/ci_28046592/davita-will-pay-495-million-settle-atlanta-whistleblower

 

[Guest Grey512]

Perhaps Spier was referring to European players such as Fresenius... But then again, when you google Fresenius + fraud, you get similar results about fines.

[Jurgis]

Perhaps Spier was referring to European players such as Fresenius... But then again, when you google Fresenius + fraud, you get similar results about fines.

 

I am pretty sure Spier said that he does not invest in any healthcare companies (including DVA) for the reason you gave above. But it was some time ago, so I don't remember what exactly he said. He also may have changed his opinion in different interviews.

[Liberty]

Perhaps Spier was referring to European players such as Fresenius... But then again, when you google Fresenius + fraud, you get similar results about fines.

 

I am pretty sure Spier said that he does not invest in any healthcare companies (including DVA) for the reason you gave above. But it was some time ago, so I don't remember what exactly he said. He also may have changed his opinion in different interviews.

 

Unless you count his investment in some healthcare companies through Berkshire (I would be surprised if he didn't own it).

[Bagehot]

Perhaps Spier was referring to European players such as Fresenius... But then again, when you google Fresenius + fraud, you get similar results about fines.

 

I am pretty sure Spier said that he does not invest in any healthcare companies (including DVA) for the reason you gave above. But it was some time ago, so I don't remember what exactly he said. He also may have changed his opinion in different interviews.

 

Unless you count his investment in some healthcare companies through Berkshire (I would be surprised if he didn't own it).

 

Guy doesn't own DVA or any other HC co (except thru BRK):

 

http://www.sec.gov/Archives/edgar/data/1404599/000140459915000009/xslForm13F_X01/aquatable.xml

 

[Guest Grey512]

He doesn't own any in the US. 13Fs do not cover non-US, non-ADR investments.

 

I did find the Guy Spier interview that I remembered though:

 

Guy Spier talks about dialysis/DVA at the 2:50 mark.

 

[rogermunibond]

Marathon pissed off a bunch of hospitals with their price raises.  These hospitals and some of their industry supply chain lobbying groups went to Sanders and Cummings.  The legislators went after a bunch of these pharmas, including Marathon.  Marathon hired a DC lobbyist who met with the various hospitals and healthcare supply chain groups, who told the lobbyist they were not going to back off.  Then Marathon sells non-strategic assets to VRX.  DC lobbyist for Marathon calls up hospitals and says we sold these products to VRX, please back off.  Somehow I don't think Mike Pearson did a whole lot of DD on the Sanders/Cummings investigations/hearings.  Either that or VRX is remarkably tone deaf to the issues surrounding pharma price increases.  See the Kaiser Family Foundation survey on Rx costs.

 

http://kff.org/health-costs/poll-finding/kaiser-health-tracking-poll-august-2015/