By Carl O'Donnell
NEW YORK (Reuters) - The controversy surrounding Valeant Pharmaceuticals' (N:VRX) strategy and its market slide this week are bad news for Wall Street investment banks that stand to lose one of their best clients.
The specialty drug company has emerged as the fifth largest payer of investment banker fees over the past three years thanks to its rapid acquisition-driven and debt-financed expansion that has made it a darling of investors.
But its business model, which has also relied on aggressive price hikes for acquired drugs, has come under growing scrutiny because of political backlash against high drug prices, dragging Valeant shares down from record highs scaled in August.
The company said earlier this week it would now focus on buying back shares and paying off debt after spending about $40 billion on some 150 acquisitions since 2008 only to see its shares plummet further after a short-selling firm raised questions about its strategy and accounting practices.
The firm's woes mean a likely loss of lucrative business for JPMorgan Chase & Co (N:JPM), Goldman Sachs Group Inc (N:GS) and other major investment banks.
Since 2012, only General Electric Co (N:GE), Allergan Plc (N:AGN), AT&T Inc (N:T) and Dell Inc have paid more than Valeant in fees to Wall Street, according to data from Freeman and Co, a consulting firm.
Valeant's investment banking fees totaled $500 million since 2012, according to Freeman. JPMorgan and Goldman Sachs have been top beneficiaries, pocketing $97 million and $84 million respectively in the last three years.
Morgan Stanley (N:MS), Deutsche Bank AG (DE:DBKGn) and RBC Capital Markets (TO:RBC) each earned roughly $50 million, according to the data.
The handsome fee payments have come even though Valeant has closed a number of its largest deals without hiring a mergers and acquisitions adviser, including its largest acquisition, the $15.8 billion takeover of Salix Pharmaceuticals in April.
In going alone in some deals, Valeant relied on the deal-making expertise of its top executives. Its Chief Executive Michael Pearson (L:PSON), previously led the pharmaceutical practice at McKinsey & Co., and Chief Financial Officer Howard Schiller, who left the company in June, was a top investment banker at Goldman Sachs. Valeant still paid fees for the financing of the deals.
Valeant's capital raising, mostly in the form of debt, has been by far the most lucrative source of deal-making fees, accounting for nearly $450 million of the total, according to the data.
For Valeant, the legacy of those capital raises is more than $40 billion in debt, which currently exceeds its market capitalization of around $39 billion.
Several other drug companies that have followed similar strategies of aggressive acquisitions, cuts in research and development budgets and price increases, have also come under pressure amid concerns about tougher drug pricing scrutiny.
Several Valeant peers, including Endo International Plc (O:ENDP), Mallinckrodt Plc (N:MNK) and Horizon Pharma Plc (O:HZNP), have also seen their shares fall, potentially limiting their ability to make acquisitions in the future.