BOSTON (REUTERS) - A precipitous plunge in the stock price of Valeant Pharmaceuticals International Inc cost some of Wall Street's top names billions of dollars on Wednesday (Oct 21).
Valeant lost US$9.62 billion (S$13.4 billion) in market value after short-seller Citron Research published a report the same day accusing Valeant of failing to disclose ties to specialty pharmacies which helped create "phantom sales" of its products. Valeant denied the allegations.
The report brought into the spotlight risks involved in its business model based on rapid expansion driven by acquisitions and aggressive price hikes.
Mounting political opposition to rising drug prices combined with sliding shares, often used as currency to pay for acquisitions, are now casting doubt on whether specialty pharmaceutical firms such as Valeant can deliver promised brisk earnings growth.
Shares of Valeant peers, including Endo International , Mallinckrodt and Horizon Pharma also suffered significant declines. Together with Valeant, they account for 8 per cent of all pharmaceutical sector mergers and acquisitions announced worldwide since 2008.
"(Pricing power) had contributed to their increased profitability, which in turn contributed to a higher stock price and more accretive acquisitions," said Mr Leonard Yaffe, who runs a healthcare hedge fund Stoc*Doc Partners. "A lot of that has unravelled."
The controversy over how Valeant books revenue comes weeks after US presidential candidate Hillary Clinton and Democratic lawmakers criticised price hikes in the US drug industry, triggering a broader sell-off in the life sciences sector.
The United States has no price controls on medicines even though such curbs are common in Europe, but specialty pharmaceutical firms, which typically focus on expensive drugs used to treat chronic or life-threatening conditions, are particularly prone to public backlash. Last week, Valeant disclosed that its pricing and other practices were under investigation by federal prosecutors in New York and Massachusetts.
Increased drug price scrutiny could also eventually lead to tougher industry rules, such as allowing Medicare to bargain directly with drugmakers, said Mr Jeffrey Loo, director of healthcare equity research at S&P Capital IQ.
Even though Citron produced no hard proof, its accusations tapped into investor anxieties about specialty pharmaceutical companies' ability to keep raising revenues, added Mr Yaffe, who is "short" on Valeant, betting its shares will fall further.
Valeant has attracted attention with several high-profile drug price hikes, including heart medication Isuprel, which it has increased eightfold since it was acquired in 2013.
Horizon Pharmaceuticals also attracted attention for increasing the price of pain relievers Vimovo and Pennsaid by 1200 per cent and 515 per cent since 2013 respectively.
"I think in the near-term you will see these companies pull back a bit on acquisitions that rely on price hikes. The decline in the stock price may put somewhat of a crimp on deals going forward," said Mr Loo.
Endo Pharmaceuticals has also drawn comparisons to Canada-based Valeant due to its reliance on a Irish domicile that offers tax advantages and gives it an edge in acquisitions. It significantly stepped up buying drugmakers after hiring chief executive officer Rajiv De Silva, who was previously president of Valeant. Endo said on Wednesday that specialty pharmacies accounted for only 3 per cent of the company's projected 2015 revenues.
Not all analysts share the same concerns as the stock's sellers. Mr Umer Raffat, a managing director at Evercore ISI, noted that the majority of Valeant's nearly US$40 billion in acquisitions has not been dependent on price hikes, including its two largest, the US$16 billion purchase of Salix Pharmaceuticals and the US$9 billion acquisition of Bausch & Lomb.
In its third-quarter earnings call on Monday, Valeant distanced itself from price hikes as a growth strategy, noting that its 2015 core profit target only assumes a 10 per cent increase in prices. Chief executive Michael Pearson also said that the company did not see any compelling acquisition targets at the moment.
Valeant also revealed plans to explore a spin-off or sale of its legacy portfolio, which is the most reliant on increased prices for growth.