Washington is about to become Valeant's worst nightmare

The U.S. Senate has launched a bipartisan investigation into drug pricing, with a special focus on embattled pharmaceutical firm, Valeant.

The investigation will be led by Senators Susan Collins (R-Maine) and Claire McCaskill (D-Mo.) Their first hearing will be held on December 13th, with subsequent hearings to follow.

"Some of the recent actions we've seen in the pharmaceutical industry-with corporate acquisitions followed by dramatic increases in the prices of pre-existing drugs-have looked like little more than price gouging," said McCaskill.

"We need to get to the bottom of why we're seeing huge spikes in drug prices that seemingly have no relationship to research and development costs. I'm proud to help lead this bipartisan investigation so that we can find some answers the public wants and deserves."

McCaskill's words are a direct attack on Valeant's business model, which emphasizes low research and development costs - the lowest in the industry - and aggressive acquisitions to add new products to its line.

Valeant's stock has fallen by more than half over the last three months amid scrutiny of this model from D.C., and the revelation that it distributed products through a shady specialty pharmacy called Philidor. Until last month, Philidor and its network of pharmacies had never been mentioned to shareholders.

The last thing shareholders want is more uncertainty about Valeant's future, but that is exactly what a string of Senate hearings will create. Executives will be summoned to Washington, they will be asked probing questions about their business practices under oath, and - perhaps most worrisome for investors - legislators will consider policies to prevent the kind of price gouging that Valeant's business model may or may not require.

Who knows how long all this could go on?

Collins and McCaskill sent letters announcing the investigation not only to Valeant, but also to Turing Pharmaceuticals, Retrophin Inc, and Rodelis Therapeutics. The letters request information on specific drugs and demand each company's full cooperation in the investigation.

The Committee's investigation will include an examination of:

• Substantial price increases on recently acquired off-patent drugs;
• Mergers and acquisitions within the pharmaceutical industry that have sometimes led to dramatic increases in off-patent drug prices; and
• The Food and Drug Administration's role in the drug approval process for generic drugs, the agency's distribution protocols, and, if necessary, its off-label regulatory regime.

The Senators have requested that the companies provide specific documents by December 2nd.