Valeant changes its spots with promises to limit price hikes, spend more on R&D

Valeant CEO J. Michael Pearson

Is that you, Valeant?

On Monday, the Canadian drugmaker unveiled some tweaks to its strategy that'll leave it looking less like its old self--and the pricing controversy surrounding the company has more than a little bit to do with it.

For starters, the Quebec-based pharma will be limiting the price hikes that have drawn questions from lawmakers and ire from presidential candidates in recent weeks, CEO J. Michael Pearson told investors on a conference call. And that limit is 10%, realized to Valeant ($VRX).

Of course, "we are not saying we are never going to take a price increase of more than 10% on our products," Pearson cautioned, as quoted by Seeking Alpha. As the company has maintained during its defense of the 56 jack-up moves it's made this year, "sometimes you need to take a little bit more in order to actually realize on price increases."

But "certainly the pricing assumptions we made for a next year on our most recent budget are lower than what we had in our previous budget," he promised.

The company also may part ways with its neurology and "other" drugs portfolio--one it says is becoming a smaller and smaller portion of its U.S. business. It's a "relatively durable, high-margin business," Deutsche Bank analyst Gregg Gilbert wrote in a Tuesday note to investors, but it's one that "is dependent on price for growth."

Ari Kellen

On top of that, Valeant says it's looking to increase its focus on R&D--something it's been averse to in the past, choosing instead to gobble up buyout targets in order to gain new products. How it spends its R&D dollars will still be "different than the approach of most large pharmaceutical companies," Pearson assured investors. But as group chairman Ari Kellen put it, "we are better able now to judge the risk-return of late stage de-risked assets"--and that'll translate to internal development of products in the dermatology and eye care areas it knows well.

And then, there's M&A, which will look a little different, too. "Given the evolution of our product mix coupled with the recent events, it is likely that we will pursue fewer, if any, transactions that are focused" on products with price-hike potential, Pearson said.

But while all of those changes may help get Valeant out of the pricing spotlight, they may lead to some bumps in the road in the near future. Specifically, "the lack of significant deal activity could be a damper on the stock given the historical importance of aggressive M&A to the Valeant story," Gilbert noted.

- read the call transcript

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