Valeant Is Making 'Platform' a Dirty Word

Valeant's peers should follow its lead and put their business model on ice for a while.

Calling Valeant a "platform" has been Bill Ackman's favorite way of arguing that the company's share price had massive potential, even at its greatest heights. The word seems almost pejorative now. 

The "platform" label, a finance favorite, means a company is seen mainly as a promising launch point for acquisitions, not as valuable on its own. High leverage and great feats of corporate engineering are usually assumed and accepted. But companies that have gotten rapidly more valuable through acquisition are suddenly under a microscope, thanks to Valeant's recent troubles.

Valeant itself, after riding the platform strategy to a 4000-percent-plus shareholder return over seven years, is abandoning M&A for now and curbing the drug-price increases that helped it grow so rapidly. Instead it will spend the "lion's share" of any cash it makes on paying down debt.

Ack, Man

For his part, Ackman still swears fealty to the platform model, citing it again on a conference call this week to explain why he hasn't sold his stake in Valeant and actually wishes he could buy more of it, despite its ongoing cliff dive. 

The platform approach is common among specialty pharmaceutical firms -- which generally focus on drugs that are difficult to administer and store -- especially those that benefit from tax inversion. The M&A boom in specialty pharma has been absolutely massive in recent years, spurred by Valeant and its imitators in a series of megadeals:

Specialty Pharma's Buying Binge

Source: Bloomberg

A number of these companies have focused on buying products or portfolios of products that were already on the market, then raising prices -- what Ackman calls "skillfully deploying capital." For older products with small markets, price increases drive sales growth where volume can't. These companies often use aggressive tactics to boost sales of their expensive drugs against generic competition and to wrest reimbursement from insurers and the government. 

Valeant was long an industry outlier in price increases and got a congressional subpoena asking for an explanation. It spends a smaller fraction of revenue on research than anyone else in a sector where R&D budgets are regularly slashed. But other specialty firms such as Mallinckrodt, Mylan, and Allergan have enacted high double- or even triple-digit percent price increases in recent years.

Such moves are going to be under heavy scrutiny going forward. Any Congressional action on drug pricing will make the situation worse for the platform companies.

Valeant has run into additional trouble over an undisclosed relationship with specialty pharmacy Philidor. It is cutting all ties after accusations that Philidor modified prescriptions to wring reimbursements for Valeant drugs out of insurers. 

Short-seller Andrew Left of Citron Research, who seems to have the most powerful Twitter account in all the stock market right now, was the primary agent of Valeant's share-price collapse. He turned his attention to Mallinckrodt this week, tweeting that it had more downside at its current price than Valeant.

Left isn't wholly reliable; when the time came to back up his extravagant claims about Valeant, he fell short. But Mallinckrodt does have ties to specialty pharmacies, and a highly priced drug that's controversial with insurers and scientists. Even though he spared Mallinckrodt an Enron comparison, he managed to send the company's share price down 17 percent on Monday:

Some Very Sour Citron

Source: Bloomberg

In an email to Bloomberg News, Left said that investors are paying attention to Valeant but ignoring other levered platform companies in the sector with reimbursement issues, like Mallinckrodt. The stock regained most of its losses on Tuesday after a Left appearance on CNBC that was heavy on rhetoric but feather-light on new detail. But its violent one-day move on so little evidence just goes to show how leery people are about this kind of company.

Another example is Endo Pharmaceuticals, whose CEO Rajiv De Silva was Valeant's COO until 2013. He is now trying to distance himself from his former employer's strategy. Endo hasn’t been as aggressive about raising prices, but it has been highly acquisitive, with eight deals at a combined price tag of more than $10 billion in the past two years. One of those helped the company move its tax domicile to Ireland. It also uses specialty pharmacies, though it is downplaying those relationships. Its shares are down $40 in the past six months from an April high of $95.92.

Being a platform is not a fundamentally bad way to go about things. There have been phenomenally successful platform companies, including AB InBev and Liberty Media. 

But when Valeant, the platform pioneer of pharma, puts its business model on ice until its troubles blow over, its peers should follow suit -- or at least ask their supporters to come up with a different name for what they do. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Max Nisen in New York at

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