Citron: 'The Real Problem With Drug Pricing In America Is Forged In A Single Word: Valeant'

• Shares of Valeant Pharmaceuticals Intl Inc VRX were down more than 15 percent on Monday.
• The decline was triggered by a letter that Congressional Democrats sent to a Republican Committee Chairman requesting a subpoena to force Valeant to “turn over documents (…) relating to massive price increases earlier this year for two drugs.”
• The representatives asked for Valeant’s CEO to be invited to testify before the Committee on Oversight and Government Reform, along with Martin Shkreli, who also seems to be engaging in a business model which involves “acquiring potentially life-saving drugs to maximize their own corporate profits.”

Healthcare and biotech stocks have come under substantial pressure lately, since Democratic presidential candidate Hillary Clinton publicly criticized the high pricing on some drugs, and vowed to address the issue if elected.

Related Link: Valeant CEO Addresses Investor Concerns In Letter; Will It Help The Stock Price?

Valeant has taken a new blow as a group of 18 Democratic lawmakers sent a letter to the Honorable Jason Chaffetz, Chairman of the Committee on Oversight and Government Reform of the U.S. House of Representatives, to request a subpoena obliging the company to turn over documents it is “withholding from Congress relating to massive price increases earlier this year for two drugs used by hospitals and other providers to treat serious heart conditions.”

In February, Valeant acquired the rights to sell Nitropress and Isuprel, two heart drugs, and increased their prices by 212 percent and 525 percent, respectively. The company justified the surge by stating that its duty is to shareholders and to “maximize the value” of drugs.

The letter continued, “We believe it is critical to hold drug companies to account when they engage in ‘a business strategy of buying old neglected drugs and turning them into high-priced ‘specialty drugs.’” For these reasons, on top of the subpoena, the representatives also requested “that the Committee invite the CEO of Valeant to testify before the Committee next week along with Mr. Shkreli since both appear to be engaging in the same business model of acquiring potentially life-saving drugs to maximize their own corporate profits.”

Citron Research’s Take

After the aforementioned letter was made public, noted short-selling firm Citron Research issued a report explaining, “Why a Congressional Subpoena to Valeant About Price Gouging on Drugs Should be Granted.”

According to the note, the rise in the prices of Nitropress and Isuprel represents a “twisted strategic assault on the healthcare system.” However, the analysts note this is not a problem of the whole biotech industry, but rather a Valeant issue: “The real problem with drug pricing in America is forged in a single word: Valeant."

The problem, according to Citron, is that Valeant has abused of the argument that drug prices should be high to support R&D, which drives innovation, especially since the company has made very little effort to improve its products.

“Escalating drug prices with no additional innovation simply drains resources from the system, and providing zero additional benefits. It should be stopped and needs to be stopped; otherwise, such practices simply encourage a crescendo of bad behavior from participants,” the report stated. “Eventually, it reduces incentives for companies to invest needed R&D that can actually improve the quality of care through the development of new drugs.”

Hedge fund investors have pressured management to “work through government loopholes to increase share price regardless of the long term effects of an aggressively leveraged balance sheet.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.