Valeant: Victim Of More Sensational Attacks

Detroit Bear profile picture
Detroit Bear


  • A recent New York Times story misrepresented Valeant as cashing in twice on higher drug prices.
  • The controversy at hand, price appreciation credits, could not be less controversial.
  • Valeant will not receive as many credits in the future as price increases moderate--which is well-known information.
  • Always fact check journalism on companies as it is often wrong or misrepresenting reality.

One of my primary takeaways from the collapse of Valeant (VRX) was that media reporting, particularly in the digital age, is get page views and ask questions later. I probably should have been more cognizant of the issue, but it took a story where I knew the facts (like Valeant).

Full disclosure: I have been a Valeant shareholder since 2011, and I have suffered losses. My position is currently underwater, and I will freely admit that the company committed many errors (Philidor disclosure being the most detrimental).

That said, the latest story from The New York Times is egregious and materially misrepresents reality. Let me present to you the facts behind price appreciation credits, and why they are immaterial to the Valeant story. The credits are simply not a reason to be long or short the stock.

What are price appreciation credits?

Price appreciation credits are fairly straightforward, and this is what The New York Times represented accurately. When a drug manufacturer like Valeant, Pfizer (PFE), or Johnson & Johnson (JNJ) raises the price of a drug, the drug wholesalers, who hold inventory, give the manufacturers a credit for the difference between the new price and the old price. This is a pretty common, vanilla practice. Wholesalers like McKesson (MCK), AmeriSource Bergen (ABC), and Cardinal Health (CAH) generally receive a servicing fee (this take depends on the drug but likely 1-3% of the ASP). They simply move the drug to the end consumer, so there is no reason for this part of the supply-chain to capture the full-value of a price increase. Otherwise, if a drug went from a list of $5 to $10, the wholesaler would capture $5 of value on its existing inventory.

Admittedly, I do not believe every firm writes this specific language into contracts for the distribution

This article was written by

Detroit Bear profile picture
A bear out in the woods.

Disclosure: I am/we are long VRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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