Valeant Case study

Pharmaceutical industry thrives on Research and development, as majority of their profits come
from patent drugs. Therefore, we can see why industry average spend on R&D is 18% in U.S.
But Mike Pearson (CEO Valeant) decided to go other way round. By reducing the R&D cost to
6% (Innovation is one of the core value of Valeant) and investing the money in merger and
acquisition of companies which have already succeeded in developing a patent drug. This helped
them to generate profit and grow many folds in short duration, thereby gaining confidence of
their shareholders which would have taken years if taken the route of R&D. I believe this is a
short-term approach of doing business because generally patent to a drug will be valid for 20
years which begins at the time of drug creation. So, it is quite possible that pharmaceutical
company might be spending its 10-12 years of early patent life in developing and getting FDA
approve, this means productive life of a patent drug is between 8-10 years during which
company makes profit from the drug. One might argue that, Valeant can continue to do M&A to
have new drugs every year but I believe there will definitely be a dead-end to such a strategy as
no further suitable options will be available.

To meet the expense of Merger and Acquisition done by the firm and to reap maximum profits in
the productive life of patent drug( approximately 8-10 years) Valeant was raising prices of the
drugs to such a extend that they jacked up the price of lead poisoning drug to 2700% in a year.
This appears to be unethical and injustice to the patients but bitter truth is, it is 100% legal in
America. To keep up the good will of the company, Valeant was giving medicines for free to
those who cannot afford them but then somebody has to pay the price for that, in this case, it was
pass on to the other customers. Though generally, it is insurance companies in America who
pays the bill of these overpriced medicines but it is not difficult to understand that they earn it
from pockets of citizens. Such situation if crosses limits often lead to a political revolution but
we have to wait to see what is the limit, as Valeant has continued their hike even after promises
were made in the court to look into severity of condition. I believe one of the reason they are still
raising price even after loss of company’s goodwill and trust of their shareholders, could be the
huge debt to the banks because of the acquisition strategy adopted by them.

I believe the long-term strategy of a pharmaceutical company should be to develop new drugs
through Research and development, I agree that the investment is huge and there is no guarantee
that the drug will be approved or will become successful in the market. But there will be
spillover effect, which means that the research done will not go in vain, instead it will act as a
ladder to success for the firm. This will indeed serve for the betterment of society which should
be the core objective of a business and not just to make profit, as Peter Drucker said “Profit is not
a cause but a result”.