One of the hottest debates in hedge fund land is starting to boil over
Love it.
If you love Valeant, this is how you explain its business model:
Valeant "is not a company whose strategy can be easily categorized," said Nomura's Shibani Malhotra in a recent note reassuring clients that the stock was still a buy.
Malhotra also said that it is not built on predatory pricing post acquisitions, but rather on efficient capital allocation.
Ackman explains it in much the same way. He also says that it has had a "massive contribution to drug development, almost more than any other company" despite the fact that its peers spend 15%-20% of their revenue on R&D to its 3%.
"Valeant doesn't pay dividends, so it's no cash leading the system," Ackman said on Tuesday. "And not buying back stock, right. So they generate a lot of cash flow. Where does it go? Well, they spend about 3 percent of revenues on R&D."
Ackman continued: "They spend money building plants to make pharmaceuticals. They pay their employees. Valeant believes that they are not good at drug development, i.e., our really coming up with new molecules and taking them all the way to the approval process.
And no one wants a difficult, low return business by definition.
Instead, Valeant focuses on marketing and distributing the drugs it acquires through M&A. That is what the company believes it is good at.
To make that happen, though, it must increase the prices of the drugs it acquires, according to Ackman.
An unfortunate side effect, according to this argument.
So where an traditional drug company raises prices so that it can work on the next innovation, Valeant is raising prices so that it can by the last innovation.
"Now if you regulate prices, if you say you can't charge market for a drug, that's going to reduce the profit," Ackman said.
"That's going to reduce the cash they have to buy the next drug company. That's going to reduce the returns the entrepreneur, the scientist, the startup can receive starting a drug company."