A government document dump just confirmed the ugliest things Wall Street didn't want to believe about Valeant

On Thursday, Valeant Pharmaceuticals' interim CEO, Howard Schiller, will testify before Congress on his company's drug-pricing practices.

You can expect there to be some heated words from the bipartisan committee, which is helmed by Rep. Elijah E. Cummings (D-Maryland).

Before the hearing, Cummings' office dropped a memo quoting a bunch of internal Valeant emails, confirming what everyone on Wall Street who rode the stock up over the past few years refused to believe - that the company's business model depended on drug-price increases.

Valeant was a hedge fund darling until October, when criticism over its drug-pricing practices and accusations of malfeasance from a short seller tanked the stock. The company was forced to react, vowing to end a relationship with a controversial pharmacy in its network and conducting an internal investigation into accusations of fraud levied against the company.

It also changed its business model slightly by partnering with Walgreens and lowering prices in an effort to increase sales volume. Even after that, though, CEO Michael Pearson, who went on a medical leave from the company in late December, told anyone who would listen that his company was not dependent on aggressive acquisitions, drug-price hikes, and a strategy of spending next to nothing on research and development.

"What we want is strong growth and volume growth, but the skeptics have said it's all price," he said on CNBC back in December.

"Our model does not depend on acquisitions, but it was enhanced by acquisitions," he said.

Emails leaked in the Cummings memo directly contradict that. Some Wall Street analysis calculated that only a third of Valeant's growth came from price increases. That doesn't hold up either.

From the memo (emphasis ours):

On May 21, 2015, then-Chief Financial Officer Howard Schiller sent an email to Mr.Pearson with the subject "price volume." He wrote: "Last night, one of the investors asked about price vs volume for Q1. Excluding marathon, price represented about 60% of our growth. If you include marathon, price represents about 80%."

Valeant picked up two drugs from Marathon in 2015.

The memo focuses specifically on Isuprel and Nitropress, two heart medications Valeant bought last year before increasing their prices by 525% and 212%.

Valeant executives and outside consultants carefully considered how to raise the prices of those drugs without drawing too much attention from healthcare providers.

From the memo (emphasis ours):

On December 29, 2014, an analyst with an outside consulting firm sent an email to Mr. Pearson with a presentation on Isuprel and Nitropress. He wrote: "In a nutshell, most of the products reviewed (Marathon, Covis, and VRX) are not on the radar and have material pricing potential." The attachment stated: "Smaller/older products (e.g. Isuprel and Nitropress) are not reviewed on formulary … Products have been in the system for so long that reviews are practically rubber stamped." It added: "However, some P&T [pharmaceutical and therapeutic] committee members have noticed a spike in older product pricing (and supply issues). … Select manufacturers have pick [sic] up these types of old products and raised prices dramatically … Manufacturers have used product shortages to drastically increase price post-resolution … P&T committee starting to look into use of drugs that exceed certain pricing threshold (e.g., increase of 2x, price/dose $200, total cost >$20k)."

The memo also shows how Valeant purposely tried to push media attention toward its patient-assistance programs to make it seem as if the company were trying to help patients.

In reality, though, the programs were a way for Valeant to keep pricing drugs to maximize profits and to force patients to go through a Valeant distribution model to buy drugs.

Here are some of the more damning quotes in the Cummings memo [emphasis ours]:

• A presentation dated January 16, 2015, from an outside consulting firm entitled "Nitropress and Isuprel Pricing Flexibility Review" stated, with respect to Nitropress: "With roughly 1 year of data showing essentially static volume performance after a substantial price increase (350%), MME [Medical Marketing Economics] believes pricing flexibility may still exist for the product up to the perceptual price point of $1,000 per vial." The presentation concluded: "With current WAC [Wholesale Acquisition Cost] pricing at $214 per vial, Nitropress is likely to still have flexibility by multiple orders of magnitude." Regarding Isuprel, the presentation stated: "Similar to Nitropress, one year of market data does not indicate negative consequence, following a substantial price increase (350%). … MME believes the price for one vial of Isuprel may be adjusted to $700."
• An undated presentation summarizing Valeant's neurology business unit showed the "Top 10 brands responsible for 63% of revenue." Isuprel, the first drug listed, had a "FY 2015 Plan Revenue" of "$279.30" million and a "Revenue Contribution" of "14.52%." Nitropress, the third drug listed, had a "FY 2015 Plan Revenue" of "$245.52" million and a "Revenue Contribution" of "12.76%." According to the presentation, 2014 revenues for Isuprel and Nitropress were only $54.5 million and $98.7 million. The presentation explained these dramatic increases in revenues: "Aggressive Pricing through consultant recommendation."
• On July 20, 2015, Mr. Pearson sent an email to a number of Valeant executives asking for "updated neuro, dental, and generics forecasts." The next day, Brian Stolz, a Senior Vice President for Neurology & Other, Dentistry and Generics replied, writing: "Overall, the numbers are down as Xenezine looks like it is at risk. … Here is what we are planning: Take a price increase this week assuming we get agreement. … Take additional price increase on Isuprel and WBXL.
• The presentation also identified "Critical Risks" to the program, including "PR Mitigation." Two "Objectives" to mitigate this risk were to "Privately address concerns from patients, insurance companies or managed care providers to prevent public displays of negative sentiment" and "Minimize media coverage of the pricing increase." The presentation also identified "Payor Risk … At What Price (Per Patient Per Year) Does an Orphan Drug 'Hit Your Radar Screen'?"
• An undated internal Valeant analysis outlined the company's "Orphan Drug Model" for three drugs used to treat diseases affecting small patient populations - Syprine, Cuprimine, and Demser. The analysis stated: "Assumptions: Maintain current sales/patients … Take initial 25% price increase to drive patients into the restricted distribution model … High deductible copay requires increased foundation support." The analysis stated: "Assume target price increases of 100% for Demser and Cuprimine ($8,924 & $1,970.4) … Assume target price increases of 500% for Syprine ($9288.90).

Valeant marketing executive Jeff Strauss later said, in response to patient concern about the increase in Sypreine's price:

"Valeant undertook an initiative to ensure all patients would have access to these lifesaving medication whereby we provide the drug at minimal or no cost to the patient (no more than $25/30 day supply). These patients are not profitable for Valeant therefore the price increases offset the costs associated with supporting this initiative.'… Kind of hard to paint us as greedy if we have removed financial barriers for patients."

Valeant was constantly prepping and modeling and planning for when generic challenges to its drugs would hit the market. That, according to the Cummings memo, was always factored into how much the company should increase a drug's price.

What's more, the memo seems to confirm what Valeant constantly denied about its business model - that it was dependent on acquiring drugs through mergers and acquisitions, gouging their prices, and extracting as much revenue from them as it could before generics hit the market. From the memo, the company seems guided by one idea and one idea alone - do whatever you need to do, but never give on price.

Valeant has already countered Cummings' memo, saying the calculations regarding Isuprel and Nitropress pricing were in the hands of outside consultants.

"Those consultants concluded that, given the significant reimbursements hospitals received under bundled rates for procedures, the prices of both drugs did not reflect their true value to hospitals and patients," Valeant said in a statement on its website.

"We try to set our prices at the appropriate levels, but we also listen to the market. In this case, we've heard from hospitals, as well as from Congress, that we set the price for these two drugs too high, and we've responded by offering volume-based discounts of up to 30% for each of them."

Should be a fun hearing.