As John Gapper observed in the FT: if the entire industry adopted Valeant’s approach, drug discovery would grind to a halt.
Gapper's article (accurately) stated:
Valeant’s business model is as simple as its accounting and tax structure are complex. While at McKinsey, Mr Pearson [the Valeant CEO] concluded that the industry he advised was spendthrift, not only in the sums it spent on headquarters and staff but in its investment in drug discovery. Employing scientists to search for new drugs was a waste of money because they often failed.
When he got the chance to put his ideas into practice he cut Valeant’s research to 3 per cent of revenues – compared with about 19 per cent at big pharma companies – and acquired products by buying other companies with debt. Valeant has taken over more than 35 companies since 2008, including Bausch + Lomb, which it acquired for $8.7bn last year.
To the extent that the stock price does the analysis this has been an outrageous success. The market clearly thinks Mr Pearson has the goods. This is one of those charts that is so good it makes no sense to view it in anything other than log-scale.
The market cap is now over $43 billion. If you add in the net debt the enterprise value approaches $60 billion. This is one of the largest companies in the space by enterprise value. Enterprise value is over ten times historic sales (though somewhat less than that relative to the current sales run-rate). Whatever: this is very highly valued.
I am however a disagreeable person. I don't look at charts much - and my skill sets are accounting and tax driven. So I am inclined to take the accounting (and hopefully tax) issues head on and thus assess Mr Pearson's achievement.
Alas - and I stating this in advance - this will be one of the more complicated projects this blog has and I have little idea how many posts this will take. I might learn a few things along the way too. So with the next post I will start you on the journey proper. Hopefully, dear readers, this will be useful for you too.
PS: In the interests of disclosure I should let you know I have done enough work in advance to have a position here. Short.