Valeant's controversial model undergoing changes, says CEO

The drugmaker, which recently drew scrutiny from lawmakers, is planning to change some of its most contentious business practices. Experts say Valeant also needs to educate lawmakers and the public about the value of its medicines.

Valeant Pharmaceuticals CEO J. Michael Pearson once described research and development as a risky investment. “The odds of succeeding in that are kind of against you,” he said in 2011, according to Bloomberg Business. “We do not bet on science, but on management.”

But it appears Pearson is changing his tune. Valeant, the CEO said this week, will tilt its business strategy away from the model that Wall Street loves but that has drawn heavy criticism, and more toward drug development.

He told analysts on Monday that there will be a “renewed focus” on internal R&D, saying the drugmaker may spend as much as $500 million per quarter on R&D in 2016, a significant boost from the $101 million it spent during the third quarter of 2015. He also addressed drug pricing, saying that future increases will likely be “more modest” and would be factored into the company's forecast for 2016.

How it got to this point is as much a function of the public backlash against pharma re-pricing as it is due to PR missteps, say communications experts.

Many pharma companies argue that drugs are expensive because one drug may be subsidizing the cost of the other failed investigational medicines that preceded it.  

When a drug company say it's risk averse—but continues to charge those high prices—that defense falls apart and, subsequently, those prices become less palatable for patients. In that way, Valeant, despite its commercial success, has failed to communicate why its prices are high and the value that those high-priced therapies provide to the healthcare system.

The drugmaker has come under fire from lawmakers in recent months over the sixfold and threefold price increases for its recently acquired heart drugs, Isuprel and Nitropress, respectively.

Valeant also announced in October that it had received subpoenas from US prosecutors seeking information about the drugmaker's pricing tactics, drug distribution and patient-assistance programs.

There has been no shortage of news over the past few weeks discussing whether Valeant's commercial model is a tenable one. The Wall Street Journal, The New York Times and others have all discussed at length whether a pharma company can eschew drug discovery in favor of acquisitions and then raise the prices of those acquired drugs.

Perception is at the heart of the matter, said Gil Bashe, managing partner of Finn Partners' health practice, saying that Valeant's business model directly counters how society thinks a drugmaker should operate.

“The public is trying to compare two very different business models,” Bashe said. “It's a different mind-set than we're used to as a society. I think that's what people are finding hard to understand. [They want to know] what are you developing, what are you originating, what are you inventing.”

The broader issue of rising drug prices is not a new one. However, public attention to the issue, fueled recently by criticism from Democratic presidential candidates as well as from payers, which have become increasingly vocal about high drug costs, has initiated a national discussion about price caps and whether the government should be allowed to negotiate drug prices.

Part of the notoriety around drug pricing—including the strategy of raising prices on old drugs—is also due to recent actions by Turing Pharmaceuticals. Its CEO, Martin Shkreli, infamously raised the price of a recently acquired drug, Daraprim, which is taken primarily by cancer and AIDS patients, from $13.50 to $750 a tablet overnight.

“We're seeing a messy debate over the price of life,” said Chris Gale, VP of public relations firm Greentarget. “Valeant is testing how much society is willing to pay for therapies, and they're in an awkward position because they lack a visual explanation of ‘well, this money is going into our R&D budget.'”

Valeant spent $246 million on R&D in 2014. In comparison, it reported $8.26 billion in revenue last year. The drugmaker has made half a dozen acquisitions in the past two years and those deals have aided the company's growth. Year-over-year revenue has nearly quadrupled since 2011, when Valeant reported $2.42 billion in revenue.

Bill Ackman, a hedge fund investor as well as Valeant's third-largest shareholder, rejected the assertion that the drugmaker doesn't invest in R&D while speaking at a Bloomberg Markets conference on October 6. “Valeant doesn't need to improve its business model,” Ackman said. “What it needs is better PR.”

He then said that Valeant has spent $40 billion in acquisitions and that in acquiring those drugs and manufacturers, it's putting money into the pockets of the sellers of those assets, which can in turn invest that money in future drug discovery.

Gene Grabowski, a crisis communications expert and partner at public relations firm kglobal, believes the issue goes far beyond that of PR.

“Valeant doesn't need a PR plan. It needs to demonstrate it has a conscience,” he said. “It confirms the worst fears of patients, of families, and of lawmakers and regulators who are just looking for an excuse like this to step in.”

The foundation of the relationship between drugmaker and patient is that people's well-being is the overriding motivation for pharma companies. When that way of thinking breaks down, or people perceive that it's breaking down, the public believes an explanation is warranted, Bashe said. “It's a clear counter to our perception of the biomedical industry,” he said. “We value innovation and ideas and accomplishments that improve the human condition.

“There's no doubt that their products improve life, but the gap of understanding is that these products improved life prior to Valeant's acquisition of them, and after they acquired them, but the price was raised,” Bashe added.

How Valeant will bridge that gap may eventually be on display. It is expected to hand over materials requested by the attorneys general in Massachusetts and New York. In a statement on October 14, Valeant confirmed it had received the subpoenas, and Pearson said the company is reviewing these materials and will cooperate with the investigation.

“We remain committed to assisting eligible patients who need our products,” he said in the statement.

A Valeant spokesperson declined further comment.

The inquiry's findings will likely serve as a catalyst for the rest of the industry, said Grabowski. “The fire is being drawn on the entire drug industry,” he said. “There's going to be more scrutiny, more response from politicians. A drug company cannot ignore the stakeholder groups and pressures today regarding corporate responsibility.”