The Growing Trend That Should Terrify Valeant Stockholders
Valeant Pharmaceuticals International, Inc. (NYSE:VRX) has been one of the hottest names in the stock market, but aggressive regulators threaten to bring the run in VRX stock to a halt.
This week brought more bad news for Valeant stockholders. On Thursday, management confirmed it had received subpoenas from U.S. prosecutors, alleging the company had engaged in “price gouging” activities. Shares of VRX stock plunged on the news, dropping more than six percent during the trading session.
Could this spell the end of the epic run in Valente stock? Let’s dig a little deeper.
Where Is Valeant Stock Heading Next?
As regular readers know, Valeant is not your typical pharmaceutical company. Rather than research and develop drugs itself, Valeant buys out smaller firms and pushes their drugs through its vast distribution network. It has been a profitable formula for shareholders, with Valeant stock soaring more than 700% over the past five years.
A number of renowned investors have been capitated by the story, most notably billionaire Bill Ackman. Over the past few quarters, the hedge fund manager has backed up the truck on VRX stock, becoming the third-largest stockholder in the company. He has even gone so far as to compare Valeant’s management team to Warren Buffett, calling the company the next Berkshire Hathaway.
But now an investigation by the U.S. government threatens to bring the run in Valeant stock to a halt. The Canada-based pharmaceutical giant is under fire for allegedly being too aggressive in raising the price of its drugs. Valeant has now been subpoenaed in two states by prosecutors over its pricing and distribution practices.
Valeant defenders say the company is being unfairly targeted and that the firm’s practices are no different from the rest of the industry. However, Valeant isn’t the only company taking heat from the Feds. The whole saga initially began with privately held Turing Pharmaceuticals, when the CEO decided to raise the price of an AIDs treatment drug by more than 5,400%. Worse still, it might only be a matter of time until more pharmaceutical companies come under scrutiny.
Why the sudden headache? We’re heading into an election year. The subpoena clearly shows the lack of faith Democrats have shown in Valeant CEO Michael Pearson after his unsatisfactory response to Democratic Senator Claire McCaskill’s letter demanding an explanation for the company’s pricing activities.
Here’s the Bottom Line on VRX Stock
As we move further into the election season, the political rhetoric on drug pricing reforms is only going to grow. Even though the Republicans have so far stayed mum on the issue, the Democrats will continue to pressure the industry. VRX stock is likely to remain under pressure if more negative news comes out in the days to come.
Bottom line: I would steer clear of Valeant stock—maybe even the entire pharmaceutical space—until the regulatory clouds clear.