here’s my new troll @timworstall pumping a company whose stock lost 40% of its value since he told people to buy https://t.co/IpbXjuswKS
— David Graeber (@davidgraeber) January 27, 2016
So, to that article about Valeant:
VRX invests little directly in drug development.
It prefers to purchase drugs already approved.
Thus, VRX acts, economically, in the same way the Ansari X-Prize worked.
The bears in Valeant (NYSE:VRX) are having their moment in the sun at present, as the stock is down 30% from its highs. The basic concern is about its business model. Rather than investing directly into pharmaceutical research, it prefers to roll up companies that have drugs already on the market. This strategy has come under attack just recently for a number of reasons, some of them possibly valid, other entirely invalid.
Some of the potentially valid reasons are laid out in the WSJ here. One of the problems with any roll-up strategy is that as the acquiring company gets bigger, the acquisitions have to get bigger and bigger in order to keep moving the dial. At some point, any such roll up just runs out of companies to buy and thus has to switch over to organic growth. That organic growth likely being rather slower than that produced by buying things in.
It’s also true that Valeant has a reputation for hiking the costs of the drugs that it purchases. At times, this might well be sensible, at others it does smack a bit of price gouging. And there are investigations starting into whether the company is quite sticking to the rule book, or at least the book of good etiquette, over such price rises.
The bears do have something of a reasonable story to tell, therefore. However, there’s another point being made which is entirely untrue. That there’s something “wrong” with merely buying the research done by others rather than conducting it in-house. This is not so: economically, the two are the same in one view, and in another, purchasing previously successful developments will increase the amount spent on research over and above what would be achieved by spending the same money in-house. That’s the sense in which Valeant is like the Ansari X-Prize.
Think of how that prize worked. The target was set and $10 million put aside to pay out if the target was reached. This called forth a number of people to compete to gain that prize. All in all, multiples of that $10 million were spent trying to gain the prize, spread across the different competitors.
So, think about the pharmaceutical development business. At one end, there’s a company like Valeant, known to be interested in purchasing drugs, and the companies that make them, after all clinical trials have been completed and marketing and sales permission granted. We would expect this to encourage interest in starting companies that might reach for that brass ring.
Now think of Valeant taking exactly that same amount of money and investing it directly into its own research. Which of the two models do we think would increase the amount of capital being devoted to early state pharmaceutical research?
As with the Ansari X-Prize, we’ve certainly got some real world evidence that offering the prize increases the amount spent on research more than direct spending of the same amount achieves. Thus, it might well be possible to criticize Valeant for all sorts of things. But the complaint that it doesn’t invest directly in research, meaning that less research gets done, is at the very least unproven. And most likely, the fact that it is there as a willing buyer of proven drugs increases the amount that is spent on trying to prove drugs.
Or, buying proven drugs is economically at least the same as, if not better than, in its effects upon capital allocation to drug research, spending the same amount of money directly on your own drug research.
There may well be other valid critiques of the Valeant business model possible, but this one, that it does little research directly, simply isn’t a viable one. So, to the extent that anyone thinks this critique is impacting the price, the stock looks a little more attractive. And it has just announced its quarterly results:
Valeant also increased its full-year revenue forecast to $11 billion-$11.2 billion from $10.7 billion-$11.1 billion estimated previously. The company also increased cash earnings estimate to $11.67-$11.87 per share from $11.50-$11.80 per share.
Many people currently believing an invalid critique, results being guided upwards by the company? I’d say that’s bullish for the stock.
Now, if you want to take that as pumping the stock I guess you can. But back in my day professors at the LSE were usually rather better at the reading comprehension than that.