Fresh off one of the biggest Wall Street drubbings in recent memory,
J. Michael Pearson, the architect of Valeant's rise into a stock market darling, and his biggest booster, billionaire hedge fund manager Bill Ackman, testified in front of a Senate committee investigating its drug pricing practices. Former CFO Howard Schiller, who was Valeant's finance head until he was fired in March, also testified.
On Wall Street, Pearson, Ackman and Schiller have been at the center of scrutiny as investors fled Valeant due to accounting irregularities and its deteriorating financial position. Wednesday, it was Washington that dug into Valeant. A committee led by Senator Claire McCaskill of Missouri and Senator Susan M. Collins of Maine accused the company of strategically buying monopoly positions in off-patent drugs and sharply increasing their prices in order to generate heady profits.
Read More: Valeant's Prescription For Disaster
"Valeant’s monopoly model operates at the expense of real people," said Senator Collins. Added McCaskill, "Valeant is the company that perfected this model of strategic acquisitions and price hikes that made it Wall Street’s dream come true... That is not social good. That is social bad."
Neither Pearson, Schiller and Ackman were were able to produce convincing answers as to how Valeant's business model could work without price hikes.
Ackman, who has invested roughly $4 billion in Valeant, said he was unaware of the extent of the company's drug prices, even when a friend described its prices for Cuprimine, a cure of Wilson's disease. "I regret we didn't do more due diligence," he said. Meanwhile, CEO Pearson was unable to name a single instance in the U.S. where Valeant did not raise prices after acquiring a drug. He also noted instances where the company could only justify an acquisition with sharp price increases.
No longer the toast of the pharmaceutical sector, Valeant's stock is off 80% in the past year as investors distance themselves from the acquisitive and debt-laden business. Pearson is expected to leave Valeant when the company releases much delayed financial results. At his ouster from Valeant a month ago, CFO Schiller hired criminal legal counsel and denied wrongdoing, but refused to leave the company's board of directors.
Ackman, head of Pershing Square Capital Management, recently joined its board in an effort to clean up the company and salvage his holding. In recent weeks, Valeant has even begun fighting for its very survival, negotiating with bondholders to avert a default.
Wall Street issues aside, Valeant was pressed in Washington to justify the foundation of its business model. Can a pharmaceutical giant survive by buying competitors, jacking up drug prices, and cutting research and development? And in attempting this strategy, what is the harm to ordinary Americans and the wider U.S. healthcare system?
The Senate committee focused on Valeant products like Syprine, Cuprimine, Nitropress and Isuprel, drugs for which the company's price hikes look most egregious. While Valeant portrayed price increases on the drugs ranging from 800% to 6,000% as a small and regrettable part of its business, the Senate viewed these prices as the engine of the company's rise and fall.
"We’re going to hear a lot of talk today about how Valeant cares about patients and R&D, but the documents don’t bear this out," noted McCaskill.
Ackman and CEO Pearson both attempted to justify the overall scope of Valeant's business, while admitting the company crossed the line in some instances. "The company was too aggressive – and I, as its leader, was too aggressive – in pursuing price increases on certain drugs," Pearson said, referencing Nitropress and Isuprel.
Valeant gained these drugs when buying Marathon Pharmaceuticals, but Pearson acknowledged the company should have walked away from the deal. "I regret pursuing transactions where a central premise was a planned increase in the prices of the medicines, such as our acquisition of Nitropress and Isuprel from Marathon Pharmaceuticals," he said.
Pearson, however, painted these drug price increases as a small piece of Valeant's, not representative of the company's 1,800 products and hundreds of drugs in development. "I regret that the narrow focus on Cuprimine, Nitropress, and Isuprel has given Congress and the public a mis-impression that our strategic focus revolved around acquiring older, off patent drugs, which in fact was not the case," he said.
To this McCaskill retorted, "I think it is misleading to say this is a problem with four drugs. I think it's the business model," she said
Ackman sought to defend against the company's reputation for skimping on research and development. "A number of observers have suggested that the more a pharmaceutical company spends on R&D, the better for society. We do not believe this to be true," he said. Pharma companies, Ackman said, need to earn attractive returns on R&D to maintain their stock prices. If cost-focused R&D can be justified, living off of price gouging cannot, Ackman said.
"Valeant has been appropriately criticized for substantially raising the prices of certain off-patent prescription drugs suddenly and without apparent justification," Ackman said. "I am committed to ensuring that this approach to drug pricing is never repeated at Valeant."
For now, McCaskill is not buying Valeant's defenses.
In a rousing opening statement McCaskill said, "you can try to dress up this business model with do good sounding phrases... Its using patients as hostages. It's immoral. It hurts real people. It makes Americans very very angry."
"Pigs get fed. Hogs get slaughtered," she added. "It's time to slaughter some hogs."
For more on Valeant see FORBES' investigation Prescription For Disaster
