Valeant Testimony Uncovers Core Problem: Drug Companies Soaking U.S. Government

It wasn't just Valeant Pharmaceuticals that was on trial Wednesday before Congress, but a business model embraced by drug companies and professional investors.

It was an investment thesis conceived and popularized among hedge funds and one core performance driver was summed up in a code phrase: “pricing power.” The core investment thesis was Valeant would purchase drug companies where they had a controlling decree to determine pricing without worrying about free market competition to various degrees. The lack of competition, in this case, came from a patent but also from a government system that doesn't allow Medicare and Medicaid to negotiate prices.

The Valeant thesis, broadly embraced as a brilliant profit scheme, would purchase a drug company, raise prices...