Profit-At-All-Cost Capitalism: The Sad Case of Valeant

By Shlomo Maital


   This is the story of a drug company called Valeant, and its CEO J. Michael Pearson, as reported in today’s International New York Times, on a page 1 story by Gretchen Morgenson and Geraldine Fabrikant, two excellent business reporters.

   Pearson was the architect of Valeant’s strategy, that drove its stock price to an astronomical $262,   then saw it crash to $11, and led to Pearson being investigated by the US Senate, along with William J. Ackman, founder of Pershing Square Capital Management, who placed a huge bet on Valeant and lost $ 4 billion; he too is under investigation.

   The strategy?   Rapacious profit-at-all-cost capitalism. Under Pearson, according to the NY Times, Valeant acquired drug makers with drugs that had few or no substitutes in the US, then jacked up the price by 10 times or more and ripped off hapless patients who needed the drug.   Great strategy? Why not, if drug makers are so stupid that they actually share value with ill people and price their product reasonably. Why bother investing money to develop drugs, if you can buy existing drugs and then run them as Economics 101 explains, as little monopolies?   Especially when the patent law makes it legal.

     What went wrong?   A huge public furor arose, politicians got involved, there were investigations, and then short sellers smelled blood and started selling Valeant shares short, putting pressure on the stock and leading to its collapse.

     Here is how Forbes magazine describes Valeant’s price-gouging actions, along with another company Turing:

      “Valeant and Turing bought monopoly positions in old drugs that faced no direct competition in the United States. But they are important medicines. Nitropress, used to treat patients whose blood pressure has risen to dangerous levels, jumped in price by more than three times to $805 per vial immediately after Valeant’s purchase, while Isuprel, which addresses heart rhythm problems, soared more than six times to $1,346 per vial. Turing purchased a 63-year-old anti-parasite pill, Daraprim (pyrimethamine), and took the even more brazen step of inflating its price by more than 5,000 % to $750/tablet.”

     How many times will we see this sad drama repeated? Short-term myopic rapacious capitalism destroys wealth and value massively. In fact, what Pearson did is not capitalism at all, it is simply stupidity, driven by Economics 101.   Count on this happening again and again, until we redefine and rebuild the basic values of true capitalism – creating sustainable long-term value for customers, and hence, for shareholders.