Bill Ackman has one reason for staying in Valeant -- but he's dead wrong

Hedge fund billionaire Bill Ackman has one big reason for staying in the center of a storm.

That storm is Valeant Pharmaceuticals, a stock that has seen its price fall 70% in the last 6 months. As Ackman’s largest position in the market, it blew a giant hole in his fund’s portfolio at the end of 2015.

But Ackman is sticking by the company, here’s why:

“We expect that much of the uncertainty will be resolved in the relative short term, hopefully in a few weeks or so when we expect the company to issue results, update guide nce and file its 10-K,” according to a statement read on CNBC Wednesday.

“Based on publicly available information it appears that Valeant’s core franchises remain strong.”

That’s where Ackman could be wrong.

The reality is that, whether you believe Valeant has been transparent and fair with investors or not, the company’s top two drugs face some serious risks. Forget the multiple federal and state investigations, forget scrutiny from Congress over its pricing practices, forget the delayed quarterly and annual reports.

Lets just focus on those “core franchises.”

Jublia vrx Q3

Valeant

Jublia

Valeant’s two hottest drugs are Xifaxan, a remedy for irritable bowel syndrome (IBS) and Jublia, a $1,000 toe fungus drug.

We’ll start with Jublia, because its challenges are more straight-forward. Jublia is Valeant’s second highest revenue generating drug, pulling in $106 million for the company in Q3 2015.

Here’s the problem. Toe fungus can probably be treated for a lot less than $1000, and people are figuring this out.

CVS, the massive drugstore chain, said in February that it is going to require customers to try and fail to be cured by less expensive drugs before selling them Jublia. It was a big development that was overshadowed by all the other news about Valeant’s financial restatements.

Consider this from a conversation Bloomberg’s Robert Langreth had with CVS’s chief medical officer:

Older nail-fungus medicines are “much more efficacious” than Jublia and cost far less, said Brennan. “It is a circumstance where we can go to clients and say, this is just waste we are eliminating.”

On the internet, there’s something of a debate raging about Jublia’s effectiveness. Some even argue that Vicks Vapour Rub is just as effective. But we’ll leave that to the people with toe fungus to decide.

Then there’s this, from Wells Fargo analysts earlier this month about how Valeant’s now-defunct pharmacy Philidor might have been propping up Jublia sales (emphasis ours):

We believe that a substantial portion of Jublia’s growth was fuelled by Philidor and anticipate a significant negative impact to Jublia from the termination of Philidor and shift to Walgreens. While Jublia has patent protection into 2030, its exclusivity ends in 2019, and we believe competitors may be keen on introducing a less expensive version of the drug.

In Business Insider’s discussions with Philidor employees last year, Jublia was brought up time and time again as one of their biggest sellers. Patients would pay a $0 copay and insurance companies could be charged between $535 and $1500 for Jublia. Jublia was also mentioned in a Philidor employee manual. From Bloomberg:

The manual instructed employees to submit claims under different pharmacy identification numbers if an insurer rejected Philidor’s request for reimbursement — to essentially shop around for one that would be accepted.

Philidor, as you know, is no more, and with CVS is being uncooperative, 2016 is already looking very different from 2015 for Jublia.

Jublia sales chartWells FargoYou’ll also note that Jublia sales have started levelling off.

Xifaxan

Valeant picked up Xifaxan in its $11 billion acquisition of of Salix Pharmaceuticals (an acquisition currently under investigation by the U.S. Attorney’s Office for the Southern District of New York and the SEC).

Since then, Xifaxan has been huge for Valeant. The company thinks it may make $1 billion in 2016, and it generated $220 million in Q3 2015 alone. It also has FDA approval for an IBS indication, which means that it is the go-to treatment for IBS (Actavis Pharmaceuticals’ Viberzi is also approved for an IBS indication).

All of this is great, but it won’t last forever. In fact it won’t last ten years (so watch your DCF models, Wall Street). Valeant was just informed that the FDA approved an Abbreviated New Drug Application (ANDA) for a generic version of Xifaxan in December. The application was filed by Allergan Pharmaceuticals, a company Valeant unsuccessfully tried to acquire in 2014.

Xifaxan has what’s called ‘Orange book exclusivity’. To file the ANDA Allergan first had to file what is called a P-IV certification. That means Allergan is challenging Xifaxin’s exclusivity because it’s either invalid, not infringed or unenforceable.
To counter and stop the generic from coming to market, Valeant will sue Allergan. If they sue within 45 days they can get a 30 month stay. To get around the 30 month stay, Allergan can either file an inter partes review against the patents which could kill exclusivity within 18 months.
In the best case scenario for Valeant Allergan will slug it out in court for 3-4 years before their drug is able to get to market. The best case.

Either way Xifaxan’s billion dollar days are numbered. Valeant has yet to respond to Business Insider’s request for comment on this story.

You thought that was it?

On Monday night Valeant announced that the head of U.S. Dermatology and Gastrointestinal, Deb Jorn, was resigning effective immediately. Jorn was responsible for both Jublia and Xifaxin.

Solodyn (of Valeant’s top 10 brands) was also under her purview.

This is supposed to be a year of transition for Valeant: The company has committed to lowering prices across the board, and paying down its $30 billion debt load.

It also said that it won’t be doing any M&A deals, which is how the company acquired drugs in the model that it said it is now leaving behind.

So that means the resilience of potential blockbuster drugs like Jublia and Xifaxan is all the more important.

But with those stars already fading, Valeant will have to prove that it has products in the pipeline that can shine as brightly as they did. That’s not an easy task in good times. It’s a horror show in times like Valeant’s.

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