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Valeant, an Aggressive Buyer of Drug Companies, Acquires Its Way to Mediocrity

Valeant (VRX), the hyper-aggressive acquirer of other drug companies that doesn't believe in R&D, just launched a new anti-seizure drug with GlaxoSmithKline (GSK). Oddly, for a company whose CEO regards drug development as an inconvenience rather than an asset, the drug was developed by Valeant and will be marketed by GSK.

Could Valeant be growing up, and in so doing turning into just another boring old drug company? Its numbers suggest that's exactly what's happening: It's acquiring its way to mediocrity.

In May, Valeant acquired Europe's Sanitas for €314 million after narrowly failing to acquire Cephalon. It digested PharmaSwiss in March and ate Biovail last year. Like the Borg from Star Trek, the company maintains a hit list of other potential targets.

CEO J. Michael Pearson's strategic logic is compelling: R&D and sales are two different, unrelated disciplines. R&D is risky, whereas selling successful drugs is not. Better to let other companies do the development, buy them when the time is right, then ditch the research labs to concentrate on marketing the final product.

On paper that could be a cheaper way of running a drug company because it cuts recurring R&D costs out of the operating budget. But the bigger Valeant gets, the less successful it seems to be at sales. The company has only disclosed data to the SEC going back to 2009, so this isn't definitive, but if you ask how many dollars Valeant earns in revenues for every $1 it spends on sales and marketing, then it appears that the company's performance is declining toward the industry average, between $3 and $4:
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Try as they might, big drug companies just can't seem to earn more than $4 in sales for every $1 spent on marketing and administration:


The same thing is happening at Teva (TEVA), another enthusiastic acquirer of other companies. It's yet more anecdotal evidence for "diseconomies of scale" in the drug business: The theory that once a company reaches a certain size there are built-in inefficiencies it simply cannot shed.

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