GUEST BLOG by Simon Read, money writer, broadcaster and former Personal Finance Editor of The Independent.
I’ve been working on a movie plot. It’s about an unscrupulous management consultant – Al Pacino, say – who takes over a small but well-thought-of drug-maker and turns it into a massive money-maker.
In the process thousands lose their jobs and research into new cures is scrapped. Meanwhile Harrison Ford’s character’s wife dies because they can no longer afford the drugs she relied on.
The film ends with the company in ruins, the boss facing a lengthy court case, with bewildered shareholders, customers and workers all having lost out.
It’s a tale demonstrating how modern morality has gone drastically wrong.
But it’s not a total work of fiction, although I reckon it would make a great movie. Apart from the embellishment of the tear-jerking death of Harrison Ford’s wife, it’s actually the story of Valeant Pharmaceuticals, a company that was set up in 1960 to develop medicine such as that used in neurology, dermatology and infectious diseases.
For around 50 years that’s what it did, until former McKinsey consultant Michael Pearson took over as boss around seven years ago.
He was a shareholder’s dream. He knew that investing in new drugs was a lengthy and risky process and doesn’t create much profit. Instead he set the company on a slash-and-burn course of buying other firms which already had successful drugs, reducing the staff to cut costs and massively increasing prices to boost profits.
It was a short-term policy that yielded great returns for shareholders. They celebrated as the share price soared more than 4,000% in around six years.
But cracks started to appear last autumn. The New York Times reported in October: “[Valeant] spends an amount equivalent to only 3% of its sales on research and development. Traditional big drug companies spend 15 to 20% of sales on research and development.”
The company raised the prices of its drugs by two-thirds last year, five times more than its closest rival. The price of two heart medications it had bought the rights of were actually increased by 212% and 525%.
Boosting its own profits while slashing research costs turned the company from a drug-maker into a money-maker leaving its shareholders to benefit while customers were squeezed.
But its profits were built on debt of around $30bn, according to the New York Times. That proved unsustainable.
The conclusion is not looking good for investors, despite the appointment of a new chief executive to turn things around. Last week the US financial news website TheStreet warned: “Valeant’s stock looks like it is heading straight to zero”.
The story has many wider implications. The chief lesson is one of unsustainable greed that lays waste to firms that may have once contributed something: for drugs companies that could have been a crucial cure that we may now have been denied.
If that’s not criminal enough, there are the workers, many who would have been with the company for decades, now unemployed and facing an uncertain future.
And spare a thought for the investors. Some ordinary folk have banked their life savings on firms like Valeant only to see their nest egg disappear as insiders pocket their profits and flee.
And that’s the biggest lesson of all. Rather than putting shareholder returns and increasing profits at the top of their agenda, companies must focus on sustainability and responsibility.
Investors can help by backing firms that are building profits for the long-term not just to benefit themselves, but to benefit us all. That’s the responsibility companies should be forced to embrace and investors can help by putting their money only with firms that can live up to that challenge.
Simon Read is a money writer and broadcaster and former Personal Finance Editor of The Independent. He’s on Twitter @simonnread