Wall Street bulls love Valeant Pharmaceuticals' lean business model, but there are side effects they aren't aware of that might give them pause.
According to several current and former employees, Valeant's zeal for cost-cutting risked harming its relationship with the Food and Drug Administration and hurt its competitive position with the development of an important drug.
Formed through an aggressive series of mergers, Valeant rose from obscurity to become one of the largest pharmaceutical companies in the world with a market capitalization of $41 billion. Now it is embroiled in its biggest takeover battle, a hostile bid for Allergan, the $51 billion maker of Botox, which it is making in tandem with the hedge fund manager William A. Ackman.
The fight has gotten nasty, with Allergan accusing Valeant of questionable and opaque accounting — charges that have led to scrutiny of Valeant's business model.
Valeant contends that most pharmaceutical research and development spending is wasted. By acquiring late-stage products and companies with drugs already on the market, Valeant avoids frittering away money. Investors, enamored of the vision, have pushed the stock up 800 percent since the end of 2009 and made a Wall Street darling of the company's chief executive, J. Michael Pearson.
But inside the company in recent years, some executives have been more skeptical of the approach. One example they cite: the company's foot-dragging on an F.D.A.-required safety trial for a drug called Sculptra.
Sculptra is used for cosmetic touch-ups; an injection builds up collagen and reduces wrinkles. Valeant purchased the drug in 2011 from the Swiss pharmaceutical company Sanofi. Sculptra had originally been approved for H.I.V.-positive patients with facial wasting, and was later approved for cosmetic use in 2009, expanding the market opportunity. But the F.D.A. required a study to determine that the drug was safe for cosmetic use in patients who were not H.I.V. positive, and Valeant inherited the responsibility to conduct the study when it purchased the drug.
From the get-go, Valeant executives were concerned the study would cost too much, according to three current and former executives who spoke on condition of anonymity. The five-year safety study could cost $25 million to $40 million, according to Tage Ramakrishna, Valeant's chief medical officer.
According to the executives, the message was clear and emanated from Mr. Pearson: The company should try to avoid having to perform the study. Ryan Weldon, who until recently was the head of Valeant's aesthetics business, said to one executive that "we're not going to spend money on that," referring to the study.
Phil Sturno, another executive, instructed executives to "do the minimal amount of work necessary to show progress" to the F.D.A., according to a former executive. Another former executive recalls being told, "Well, let's just take our time doing the study."
Mr. Weldon, who no longer works at Valeant, did not respond to calls seeking comment. The company declined to make Mr. Sturno available and he did not return calls seeking comment. The company provided an affidavit signed by Mr. Sturno saying that statements attributed to him "were not made."
Valeant said it did not delay or slow-walk the study. "We do run lean," Mr. Ramakrishna said. "That's our business model, but we do not put anyone at risk. We put no patients at risk."
Mr. Pearson, the chief executive, said in an interview on Tuesday: "We have a very constructive, positive relationship with the F.D.A. If you actually look at our track record and number of approvals and issues we've had, I'll match it with any pharma company." The company notes that it has received more than 50 approvals for drugs and medical devices from the F.D.A. over the last five years.
"From Day 1, certain things are sacrosanct," Mr. Pearson said. "The bucket of sacrosanct things is manufacturing, regulatory and ethics." The company said in a statement that "our commitment to patient safety and regulatory compliance is absolute."
In the case of Sculptra, even some midlevel executives thought the F.D.A. was being overly cautious. A long-term safety study of Sculptra in H.I.V.-positive patients, who have compromised immune systems, had not revealed any concerns, suggesting the treatment was unlikely to cause problems in healthy patients.
A team of executives came up with a Hail Mary strategy, as they openly called it inside the company. After a long delay, Valeant sent a request to the F.D.A. in March 2013 asking that the company be allowed to gather data from H.I.V.-positive patients instead of performing the larger study. The strategy was unsuccessful.
In June 2013, the F.D.A. put the company on notice, flagging the company's study with a "progress inadequate" designation on the agency's website. The company scrambled to respond, and the F.D.A. rescinded the designation a few months later.
Such a trial could have started enrolling patients in about three months, according to an internal document I reviewed. Instead, the company and the agency continued discussing how to design the study. The company "went back and forth and went back and forth" with the F.D.A. over the study, said Mr. Ramakrishna, the company's chief medical officer. Much of the delay, he said, was a result of a discussion of the complex protocol for the study, which the company said did not comport with how the drug was used in the real world.
The F.D.A. and the company finalized the protocol in November 2013. After additional back-and-forth, the company said it received the approval letter to allow Valeant to start the study on April 23.
All the while, the company sold the treatment, and it ultimately never started the study. Now Valeant is divesting the rights to Sculptra to a division of Nestlé, which will inherit the responsibility for conducting the study.
Running a tight ship has other downsides. Employees get laid off frequently, as Valeant integrates its latest acquisition, and high turnover reduces institutional memory. It also results in promotions of executives who are less ready to take on their responsibilities, current and former employees say, and executives are often reluctant to raise concerns about problems.
"Nobody will object to anything," said a former executive who requested anonymity to preserve her employment opportunities within the industry. "They are too busy. And they are worried about being laid off."
The company counters that its top management ranks are stronger than ever and that internal surveys show morale is high.
One victim of Valeant's thin staffing was Jublia, a drug to treat toenail fungus, the current and former executives say. The market for the drug is estimated to be worth as much as $800 million a year.
Jublia ran into manufacturing problems. Some bottles were leaking, and the F.D.A. was concerned. Again, Valeant took an aggressive tack with the regulator, downplaying the severity of the problem, according to people I spoke with. In the middle of last year, the F.D.A. declined to approve the treatment.
Some executives believe that if the company had not been so thinly staffed, experts would have been able to find a solution to the problem more quickly or fix it before the F.D.A. turned down the application, resulting in a lengthier delay. "It's a prime example of not having a great set of expertise or enough time to look into the submission documents," a former employee said.
Mr. Ramakrishna said on Tuesday that there were "minuscule amounts" spilling out of the bottles, and that the concern was that it "could smear the label." Valeant executives noted that the drug had been approved in Canada, based on the same manufacturing data. They said the company did not play down the issues with the F.D.A., and that it did not have a dearth of expertise in manufacturing or regulatory affairs.
Jublia was finally approved in the United States in June, but the delay was significant. Valeant was racing to bring its drug to market ahead of a competitor, Anacor Pharmaceuticals. Anacor was able to close much of the gap, winning approval in July for its drug, Kerydin.
Wall Street loves companies that live fast and run thin. Some flourish, but many die young. It's not yet clear where Valeant will end up.