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 Shares of Valeant fell 19 percent on Wednesday after influential
short-seller Citron Research accused the company of using specialty
pharmacies, through a network led by its partner Philidor Rx
Services, to inflate its revenue, an allegation the drugmaker
denied. Specialty pharmacies are designed to deliver medications
with unique handling, storage and distribution requirements, often
for patients with complex conditions such as cancer, multiple
sclerosis or rheumatoid arthritis. They can provide more detailed
guidance for patients on how to take the drugs. Specialty drugs are
often expensive, sometimes priced at over $100,000 a year.
The industry has been growing quickly as drugmakers shift research
and sales efforts to more complex medications. Pembroke Consulting
estimated early this year that the number of accredited specialty
pharmacies would jump by nearly 100 to a total of 250 in 2015.
In the past, drugmakers were directly involved in distribution of
their products. Merck & Co <MRK.N>, for example, owned a pharmacy
service company known as Medco. But it spun off that business in
2003, partly due to concerns over potential conflicts of interest.
Medco was later acquired by Express Scripts Holding Co <ESRX.O>,
which is now the largest U.S. pharmacy benefits manager.
A New York Times report earlier this week said that Valeant worked
with Philidor Rx Services, based in Hatboro, Pennsylvania, to
increase sales, and prices, for treatments that don’t meet the
specialty criterion, including drugs for acne and toenail fungus,
and that regular pharmacies may not prescribe.
The same day, Valeant disclosed that a growing percentage of its
revenue is coming from products dispensed through specialty
pharmacies, and that it had purchased an option to acquire Philidor.
Valeant is Philidor’s main customer.
“We find specialty pharmacies improve patients' access to medicines
at an affordable price, and help ensure physicians are able to
prescribe the medications they believe most appropriate for their
patients,” Valeant Chief Executive Michael Pearson told investors on
a conference call.
He said that for many of the company’s skin products, Philidor and
other specialty pharmacies fill a customer’s prescription before
reimbursement is worked out with an insurer, and that Valeant only
recognizes revenue from the products once the drug reaches a
patient.
Pearson also described how Valeant's relationship with another
specialty pharmacy, R&O Pharmacy LLC of Camarillo, California,
turned sour. Valeant said it had shipped $69 million worth of
medications at wholesale prices to R&O, and that the pharmacy “is
currently improperly holding significant amounts it receives” from
insurers.
R&O has sued Valeant in California over its efforts to claim the
money, saying it has no contractual relationship with the drugmaker.
Representatives of R&O declined to comment.
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Citron alleged that R&O and Philidor may actually be the same
company, and that the two were used by Valeant to create phantom
accounts to inflate revenue. In a statement, Philidor said R&O is
part of its network of affiliated pharmacies and that it provides
services to those partners including call center functions, help
with insurance claims, technical support and “certain management
services.”
“Philidor does not currently have a direct equity ownership in R&O
Pharmacy or the affiliated pharmacies, but does have a contractual
right to acquire the pharmacies now or in the future subject to
regulatory approval,” the statement said.
Scott Knoer, chief pharmacy officer at the Cleveland Clinic, said
the web of relationships raises concern. Cleveland Clinic and other
hospitals have been hit financially by Valeant price increases on
heart drugs Isuprel and Nitropress.
“There would be an inherent conflict of interest if a specialty
pharmacy is owned by someone making the drug,” Knoer said. “There
could be pressure on the pharmacy to start patients on the drug, or
continue patients on it, or not stop them" as warranted. While
concerns over Valeant’s ties to its specialty pharmacies hit rival
stocks on Wednesday, both Allergan Plc and Endo International Plc
were quick to say their businesses did not operate in the same
manner.
Allergan said about 3 percent of its U.S. sales of branded drugs are
distributed through specialty pharmacies, most of which are
specialty products that require careful handling. Endo said it uses
specialty pharmacies mainly for branded products that need to be
administered by doctors, and that drugs distributed through this
channel represent about 3 percent of the company’s projected total
revenue for 2015. It said any specialty pharmacies that it works
with are fully independent of the company.
(Additional reporting by Caroline Humer and Ransdell Pierson in New
York; Editing by Michele Gershberg and Leslie Adler)
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