I make no secret of the fact that I’m not an expert on healthcare companies. In fact, I get my healthcare exposure through specialized mutual funds rather than selecting stocks myself.
So I’ve been taken aback by recent press furor over the hedge fund practice of encouraging the acquisition of sleepy drug companies with the aim of jacking up the price of key drugs owned by the target. The case of Martin Shkreli (who looks like he should be in middle school) and his company Turing Pharmaceuticals, which acquired a drug that had been selling for $13.50 a dose and raising the price to $750 became a flash point for social concern–especially after Mr. Shkreli made the rounds of financial TV shows visibly gloating over his “achievement” and the attention it brought him. What could he have been thinking?
That performance has drawn negative attention to Valeant, a serial acquirer whose playbook also includes a liberal dose of the same price increase tactic.
My quick and imperfect look at Valeant suggests that the company’s mind-bogglingly high 50% + return on equity last year was fueled mostly by financial leverage. But it’s possible that as much as a third of its 16% return on capital is due to raising prices on acquired drugs (the company’s disclosure doesn’t make it easy to get a good figure). So without tons of borrowing and the price hike maneuver it seems to be a pretty pedestrian operation to me. Remember, though, I’m no healthcare expert.
As to Valeant, which has lost about a third of its market cap since Hillary Clinton’s tweet objecting to “outrageous price gouging” by pharma firms, I don’t think it’s the details–or lack of them–in its financial disclosure that’s the issue.
I firmly believe that Americans are unwilling to allow entities to make unusually high profits from taking advantage of the medical problems of others. Sure, we’ll pay for revolutionary new drugs, but we won’t stand for large price hikes for mature ones. We think it’s unfair …and won’t tolerate it.
I don’t mean to be making an ethical judgment, although I do personally think this is an unconscionable practice. As a nation we put up with gun violence, we tolerate the Motor Vehicle Bureau and decades of lousy cars from GM. New Yorkers are ok with Mayor DeBlasio’s opposition to charter schools in poor neighborhoods. On the other hand, they wouldn’t put up with his efforts to quash Uber or to remove the pedestrian mall in Times Square (installed by the predecessor he satanizes).
My point? I find it interesting/astonishing that the prominent hedge funds that back Valeant are so detached from mainstream American culture that they think “outrageous price gouging” is socially acceptable. It’s not.