Valeant Needs to Wade, not Dip, Into R&D
Valeant isn't like most drugmakers. While rivals rely on scientists peering into microscopes to develop new drugs, Valeant leans more on bankers to go out and find other companies making drugs it wants. So research and development has never gotten much attention on a Valeant earnings call -- until this week.
Mike Pearson, the chief executive, said on Monday’s call that Valeant is going to increase internal R&D next year to between $400 million and $500 million. That’s up about 50 percent from the 12 months through September.
The shift comes as the $56 billion company faces two major hurdles to its business model. First, lawmakers are scrutinizing the large price hikes Valeant has made on drugs it has purchased. Second, its large debt load is a catch-22: Until that shrinks, making acquisitions is tricky. But acquisitions are necessary to bring in more cash flow to service the debt.
Many investors favor Valeant's strategy of borrowing money to buy drugs created by labs elsewhere. But its sustainability has always been in question.
Embracing R&D is a step in the right direction, but Pearson’s forecast is hardly impressive. For the past 12 months, Valeant’s R&D was equal to only 3 percent of sales. That percentage will barely budge next year. Analysts project Valeant will generate $13.5 billion of sales, so $450 million of R&D would be only 3.3 percent.
That may not sound so bad. After all, cost containment is a good thing, and Valeant doesn’t bill itself as a drug developer. But check out how it compares with other major players:
At some point, Valeant is going to need to change how it thinks about R&D. It will probably never look like Bristol-Myers or Eli Lilly. That's not necessarily a bad thing -- too much R&D can be fruitless. But there are signs that Valeant’s buy-to-grow method could turn precarious. This level of R&D won’t be enough to prepare for adverse effects. At 3.3 percent, it’s just a lick and a promise.
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