Over the past five years, Valeant Pharmaceuticals' (BHC -0.69%) stock is up 856%, absolutely smashing the returns delivered by the market. The company has recently made further waves by teaming up with activist investor Bill Ackman's Pershing Square Capital in a bid to take over Allergan (NYSE: AGN), the specialty pharma company famous for Botox.
In the following video, Motley Fool analysts Michael Douglass and Brendan Mathews discuss Valeant's unique business model. As Brendan explains, Valeant only invests a relatively small amount in research and development. According to management, the returns on investing in research simply aren't high enough in most cases. Management believes it can get a better return by purchasing proven drugs or companies with existing product portfolios. It's a lot less risky, and the returns, especially if acquisitions are made judiciously, are much higher than investing in drug development. Michael points out that this isn't a totally new strategy -- Pfizer (PFE -0.12%), for instance, hasn't been shy about making acquisitions. But Valeant has definitely taken cost-cutting to the next level with its R&D reductions.
