Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

You would think that a stock-price collapse of more than 60 percent might convince Valeant to change its ways.

But as it approaches a high-pressure investor meeting on Wednesday, where frustrated shareholders expect a detailed plan to restore profit growth, the Canadian specialty pharmaceutical firm remains defiant about a core part of its business -- its increasingly controversial model of buying inexpensive drugs and jacking up their prices, while spending little on its own research and development.

A Senate hearing last week focused on the price-increase part of that model, and it was pretty scathing. Several lawmakers equated the practice to holding patients for ransom. Some called Valeant and other firms that innovate more in corporate structure than science "hedge funds." 

Not a great look for a firm that needs to convince investors that waves of criticism and bad news are mostly in the past. 

Back to Earth
Valeant's business model continues to be scrutinized
Source: Bloomberg

In response to the hearing, Valeant released a statement defending its practices, calling it unfair for the Senate to focus on a small number of its most expensive drugs. Valeant said its biggest price increases don't impact patients and that its R&D model is fine, just different, thank you very much.

Valeant has gestured in the direction of reform. On its most recent earnings call, CEO Michael Pearson said the company would price less aggressively and base fewer drug acquisitions on the ability to make cheap drugs less cheap.

But the company's defensive response to the Senate hearing, and to correspondence from Missouri Senator Claire McCaskill, makes its promises less convincing. Valeant doesn't seem to be coming to grips with the idea it may need to substantively revamp its business model amid a host of challenges, even as investors tap their toes.   

The Senate hearing scrutinized the practice of buying older drugs with potential generic alternatives that have small patient populations, low prices, and one manufacturer, making big price increases possible and profitable. (Valeant's preferred term for these gems is "mispriced assets.") The strategy won't produce blockbusters, but as Valeant has shown, it can be very profitable when you find a bunch of them.

This basically describes a big part of Valeant's business model: Its best-selling drugs come from acquisitions. No single product makes up more than 4 percent of its revenue. And half of its sales growth comes from price increases. Senators on both sides of the aisle were highly critical of the strategy.  

The hearing surfaced two potential remedies. Committee members seemed to like the idea of fast-tracking FDA approval of generic alternatives for economic reasons, when branded drugs with generic alternatives are very highly priced, instead of just for clinical reasons, which is what the law currently allows. That would make Valeant-style price increases subject to rapid competition from other manufacturers. The same is true for the second idea, producing a definitive and trackable list of the sort of drugs most at risk of being acquired and priced up.

There are still more hearings to come, and a long path to any real change. But reform plans focused on older drugs seem politically plausible. While Republicans don't much care for price controls, they should be all for fostering healthy competition -- especially where the free market is failing, with sudden drug shortages and price spikes of more than a thousand percent without any change in demand. 

More competition would not only threaten Valeant's future price-based acquisitions, but its current revenue from off-patent and expensive drugs.

And that's not Valeant's only problem. It has put M&A on hold as it tries to reduce a high debt load. The company's adjusted net debt/Ebidta ratio is well above its peers, according to a BI analysis: 

No M&A for You!
Valeant's taking some time off from the buyout market as it pays down debt
Source: Bloomberg Intelligence

So it will be locked out of its preferred strategy of buying other firms and slashing costs. And the 65 percent annual sales increases it has booked over the past five years, on average, are almost certainly unattainable.  

Acquisitions of branded drugs that are still protected by patents, when the company can actually afford to do them, are expensive and risky compared to the "mispriced asset" strategy Valeant has abandoned for now. The company's recent $1 billion outlay for Sprout, the maker of a drug likened to "female Viagra," looks increasingly like a total disaster, for example. Sales have been minimal, and Sprout's former CEO just left Valeant

Valeant's sales of drugs that do have generic competition are increasingly threatened, as well. Those can only grow if the company manages to get doctors and pharmacies to pick its drugs over much cheaper alternatives. That requires aggressive sales tactics, deals with specialty pharmacies, and other tactics increasingly scrutinized by regulators, insurance companies and pharmacy benefit managers. 

Valeant's defensiveness may just be putting a brave face on an increasingly ugly outlook, or it may be an unintended admission that it hasn't yet figured out a new way to grow. But it may want to strike a much more conciliatory tone on Wednesday. 

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

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