Valeant Pharmaceuticals Intl Inc.: We Are Still in the Early Innings

Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) is not even close to the end of the tunnel.

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Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) shares have rebounded nicely over the past couple of weeks; as of this writing, they have gained roughly 40%.

Interestingly, there have been few new developments over this time, and that may be precisely why Valeant’s stock price has rebounded. In other words, the lack of headlines may have convinced some investors that Valeant’s troubles will pass.

But don’t be fooled. Valeant is still in the early innings of its saga, and the end result could be devastating. We take a closer look below.

More dirty tricks

If you believe Valeant’s story, then all of its problems can be traced to a rogue specialty pharmacy called Philidor, which accounted for just a small percentage of the drug maker’s sales (before Valeant terminated the relationship).

But old habits die hard, and some believe that Valeant is still using similar tactics. One of them is John Hempton of Bronte Capital, who notes that numerous pharmacies have been sprouting up that all seem to have ties to Valeant. One of these pharmacies recently applied for a license in Arizona, with former Valeant employee Gary Tanner presenting himself as the owner.

Meanwhile, numerous authorities–from attorneys’ offices to politicians–are investigating Valeant for its pricing practices. It’s safe to say that there are still many more headlines to come.

The role of pharmacy benefit managers

Pharmacy benefit managers (PBMs) such as Express Scripts can be thought of as the “gatekeepers” in the pharmaceutical world. Their role is mainly to negotiate drug prices with the pharmaceutical companies and process drug claims.

The power of PBMs cannot be overstated. They were the ones who first decided to stop working with Philidor (which is what prompted Valeant to sever that relationship). They are also making life very difficult for Turing Pharmaceuticals after the company raised the price of Daraprim by over 5,000%.

If PBMs start dropping Valeant drugs from their formularies and replace these drugs with generics, then Valeant’s profits could take a significant hit.

Simply too risky

Let’s not forget, Valeant has roughly US$30 billion in debt, which isn’t all that surprising for a company that’s so acquisitive. But it does mean that any dent in its business model could put pressure on its balance sheet, too. This is not a position any company wants to be in, much less one with as many enemies as Valeant has. You should stay far away from this stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of Valeant Pharmaceuticals.

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