Under Political Pressure, Valeant Changes Course, May Spin Off Neuro

Bill Ackman loved its business model of purchasing companies with “mispriced” drugs and raising prices, but, under fire from regulators and legislators, Valeant(VRX) announced today that it will be completely changing its business model.  Recent outrage about huge price increases for acquired drugs including public statements by Democratic Presidential candidate Hillary Clinton have been a cause of the recent dramatic drop in prices of drug and biotech stocks.

Valeant has been particularly vulnerable to such charges, with its R&D budget at less than 3% of revenue. On a conference call following better-than-expected Q3 results, CEO Michael Pearson outlined a major change in strategy that will transform the drug maker and buffer it against charges of price gouging.  The company increased R&D spending by 26% sequentially in the most recent quarter, and will aggressively pay down debt rather than continue to make large, frequent acquisitions. It will especially avoid acquisitions based on mispriced drugs.

Pearson also stated that Valeant is considering selling or spinning off its Neuro division.  This division, which has been particularly dependent on the price increases under fire, had $564.5 million in revenue in the most recent quarter, comprising 20% of Valeant’s revenue. In this climate, we view a sale as unlikely and see a strong likelihood of a debt-laden spinoff.

Disclosure: The author holds no position in any stock mentioned.