In a contentious Senate hearing Wednesday, outgoing Valeant chief executive Michael Pearson said the embattled drugmaker had made mistakes in pursuing a strategy rooted in acquiring older drugs and sharply increasing prices.
This strategy has brought intense scrutiny on Valeant and its business practices, sinking the company’s stock and sparking investigations by Congress and the Securities and Exchange Commission. Combined with shady accounting practices and misstated financial reports, the pressure has reversed the fortunes of the once high flying company and led to Pearson’s ouster as CEO.
Also speaking in front of the Senate Special Committee on Aging, Valeant board member and activist investor Bill Ackman was quick to promise substantial price reductions on four drugs which senators had specifically singled out. Ackman said he would convene a conference call tomorrow with other directors to recommend Valeant dropping the price of two heart drugs, Isuprel and Nitropress, by at least 30%.
But Senators on the committee were not placated and repeatedly castigated the company for manipulating prices and making needed drugs inaccessible for patients. “This is misleading to act as if this is the problem with four drugs. This is the business model,” said Senator Claire McCaskill (D-MO).
Isuprel and Nitropress have been frequently cited as examples of Valeant’s aggressive pricing. In February 2015, Valeant acquired the two heart drugs from Marathon Pharmaceuticals and immediately increased prices by 525% and 212%, respectively.
Valeant has been slammed for these price hikes, particularly because some hospitals rely on the drugs to treat heart problems in patients. Valeant previously offered tiered volume rebates of up to 30% for hospitals which use the drugs the most. And in his opening statements, Pearson specifically called out this program as an example of Valeant’s efforts to change.
But Senator McCaskill quickly jumped on this claim, saying she had surveyed large and small hospitals in Missouri and found zero hospitals which had received the discounts.
Speaking in a panel before the Valeant officials, Dr. Richard Fogel, the chief clinical officer of a 20-hospital system in Indiana, corroborated this. He said his system had not received nor been offered any discount on the drugs. Calls and emails made to Valeant went unanswered.
In 2015, price increases on these two drugs alone resulted in a $900,000 cost increase for the St. Vincent system, and a nearly $12 million increase for the broader network, according to Fogel’s testimony.
After hearing of the difficulty in obtaining the 30% discount, Ackman said he would recommend extending the price reduction across the board.
Later in the hearing Ackman promised broader action. “You can expect from us within weeks and hopefully sooner a response about where we are going to price these drugs and it will be significantly lower than where they are priced now,” he said.
Syprine and Cuprimine
Ackman’s promise to lower prices included two other drugs, Syprine and Cuprimine, which the committee also focused on in the hearing. Both treat a rare genetic disease that leads to the accumulation of copper in the liver and brain and is usually fatal if untreated. Valeant had also raised the prices of these drugs soon after acquiring them.
Ackman did not commit to specific percentage decreases for the two but said “We are going to come up with an appropriate price based on an appropriate rationale.”
Berna Heyman, a patient with the condition, had testified earlier in the hearing how her co-pay for Syprine skyrocketed to a projected $10,000+ per year after Valeant acquired the drug. She had been denied financial help under Valeant’s patient assistance program until The Financial Times interviewed her for an article.
Valeant then called her offering assistance and has now extended a free lifetime supply of the drug to her, according to Pearson. She refused the flowers the company sent, however.
Aberrations or business as usual?
Both Pearson and Ackman made attempts to frame Valeant’s price increases as unique to a small segment of the company. “I think a relatively small percentage of Valeant’s business – say 10% - 15% - have taken down the business,” Ackman said.
Pearson later described the aggressive price increases as “overshadowing” the rest of Valeant’s business, which includes Bausch & Lomb and other consumer health products.
But senators widely saw the price hikes for the four drugs mentioned in the hearing as emblematic of wider practice at Valeant. In one exchange, McCaskill asked Pearson, “Can you find me one drug Valeant did not raise the price on?”
Pearson replied, “Not in the United States.”
Later, Senator Collins (R-ME) said that despite Valeant claims these four drugs were getting smaller as a share of net revenue, data examined by the committee showed net revenue from the drugs has actually been rising. “These price increases seem to be very much the core of Valeant’s business,” Collins said.
In unaudited financial documents, Valeant indicated Nitropress and Isuprel were the 9th and 11th highest earners for the company in the fourth quarter of 2015. Cuprimine and Syprine also made Valeant’s list of its top 30 drugs.
Pearson to Papa
Valeant recently announced former Perrigo chief Joseph Papa would take Pearson’s place as CEO of the company. Ackman indicated Papa would likely start next week and appeared ready to turn the page on Pearson’s tenure as CEO, despite the close relationship that once existed between the two.
In perhaps a case of bad timing, Valeant disclosed Papa’s lucrative pay package while the hearing was ongoing. Papa will receive a base salary of $1.5 million, with $8 million cash payment to compensate him for Perrigo stock he forfeited when he left that company. Adding in bonuses, options, and restricted stock bring Papa’s pay to about $67.4 million, according to Bloomberg.
Papa will have an uphill battle at Valeant, however. Given the tone of the hearing, Congressional pressure looks unlikely to ease any time soon. And Valeant still must file its delayed annual report soon if it wants to avoid default on its credit facilities and bonds. Already a number of bondholders have issued notices of default, giving Valeant a 60-day window to file the report.
Valeant has pledged to file the report on or before April 29.
If the company keeps its promise, it will likely be the last thing Pearson does as head of Valeant.