In a few moments, a major showdown will take place in the Senate when on the same table Valeant’s outgoing CEO Michael Pearson will sit next to Valeant’s most prominent investor Bill Ackman and also the former CFO, Howard Schiller, who the company recently tried to scapegoat for most of the problem that sent the stock price of VRX crashing 85% from its summer 2015 highs.
The hearing of the Senate Special Committee on Aging is the third in a series focused on “sudden, aggressive price spikes of decades-old prescription drugs,” according to an e-mailed statement. Valeant is one of four drugmakers under investigation by the panel, which is probing practices including acquiring and then significantly raising the list price of older medicines. Pearson was deposed for nine hours by the committee last week, according to Bloomberg.
According to his prepared testimony, Pearson will tell lawmakers that he was “too aggressive” and made mistakes in drastically hiking prices for several critical medicines. Pearson will issue the unusual mea culpa on Capitol Hill for the business strategy that made Valeant an industry powerhouse but also triggered a backlash against the Canadian drugmaker.
“Let me state plainly that it was a mistake to pursue, and in hindsight I regret pursuing, transactions where a central premise was a planned increase in the prices of the medicines,” Pearson states in the written testimony.
While the comments come days before Pearson is to be replaced as Valeant CEO with the former CEO of Perrigo, they may not win much sympathy from members of the Senate Committee on Aging. The committee is investigating the dramatic price increases pushed by Valeant and several other drugmakers.
Another problem as noted by Wells Fargo earlier, is that as the following chart from Wells Fargo clearly shows, in the year after which Valeant got in trouble for boosting prices, it continued to do so, and in the first quarter of 2016 alone, the average year-over-year price increase across a basket of 30 products was a whopping 78%.
A longtime corporate consultant, Pearson took the reins at Valeant in 2008 and embarked on a spree of more than 140 acquisitions, buying up rights to older, niche drugs and repeatedly hiking prices. Pearson’s approach — which bypassed the huge research and development investments typically made by drugmakers — seemed to offer a cheaper, more reliable business model and made him a favorite of Wall Street investors. He also pioneered the tax-dodging “inversion” technique later employed by other U.S. companies, merging with firms overseas to take advantage of their reduced tax rates.
The company caught the attention of Congress last year after buying two life-saving heart drugs, Nitropress and Isuprel, and hiking their prices, tripling one and raising the other six-fold.
Pearson says that Valeant decided to raise the prices after learning that cheaper generic versions of the drugs would soon hit the market. “In retrospect, we relied too heavily on the industry practice of increasing the price of brand name drugs in the months before generic entry,” he states in his testimony.
In recent months, Valeant has been swamped by a host of problems including three ongoing federal probes of its accounting and pricing practices, massive debt and the threat of default on agreements with creditors and bondholders.
Pearson also got in trouble recently for refusing to be deposed only to ultimately succumb to Congressional demands.
We expect sparks will fly, tempers will rise and fingers will be pointed during today’s testimony starting at 3:30 PM eastern.
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