`
`Leaked Valeant documents show Philidor strategy for sales - Business Insider
`
`Leaked documents shed light on the defunct
`pharmacy that brought Valeant to its knees
`
`MATT TURNER AND LINETTE LOPEZ
`NOV. 8, 2016, 6:16 AM
`
`When Valeant Pharmaceuticals' secret relationship
`with a pharmacy that sold its drugs directly to
`consumers was exposed last year, the company first
`tried to downplay its importance.
`
`It hadn't told investors about the pharmacy, called
`Philidor, which Valeant had an option to acquire
`and which accounted for at least 5% of sales. When
`the existence of the pharmacy and accusations that
`it was using fraudulent tactics to push Valeant's
`drugs came to light, the company was quick to break
`off the relationship.
`
`We're starting to understand how much that must
`have hurt. You see, Valeant had big plans for
`Philidor.
`
`Valeant had a sales plan dubbed the "Philidor
`strategy" to use the pharmacy and increase the
`volume of shipments for two of its drugs, Solodyn
`and Jublia. For Solodyn, an antibiotic to treat acne,
`the rebates and payments drove a recovery in
`flagging sales.
`
`Joe Papa, CEO of Valeant
`
`Reuters
`VRX Valeant Pharma I
`11.41 -0.24 (-2.10 %)
`
`The strategy is detailed in an internal Valeant
`presentation obtained by Business Insider. Dated
`August 2015, two months before the relationship
`with Philidor was exposed by the Southern
`Investigative Reporting Foundation, the
`presentation shows that the pharmacy's aggressive
`sales and marketing tactics all but completely
`supported growth in the two drugs — with Philidor moving $46 million of Jublia, a toenail fungus treatment, and
`$106 million of Solodyn in the first quarter of 2015.
`
`Disclaimer Get real-time VRX charts here »
`
`Valeant representative Elif McDonald would not comment on this story. The company's representatives at Sard
`Verbinnen, Chris Kittredge and Jared Levy, also did not respond to Business Insider's requests for comment.
`
`Key to Philidor's approach was virtually giving away millions of dollars worth of drugs and making sure that
`insurers and middlemen who approve insurance payments were getting fat rebates for securing payment for the
`drugs. While it worked, the cost was enormous — in Solodyn's case eating up close to three quarters of any new
`sales.
`
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`ACRUX DDS PTY LTD. et al.
`
`EXHIBIT 1524
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
`
`
`
`10/28/2017
`
`Leaked Valeant documents show Philidor strategy for sales - Business Insider
`
`Leaked documents shed light on the defunct
`pharmacy that brought Valeant to its knees
`
`MATT TURNER AND LINETTE LOPEZ
`NOV. 8, 2016, 6:16 AM
`
`When Valeant Pharmaceuticals' secret relationship
`with a pharmacy that sold its drugs directly to
`consumers was exposed last year, the company first
`tried to downplay its importance.
`
`It hadn't told investors about the pharmacy, called
`Philidor, which Valeant had an option to acquire
`and which accounted for at least 5% of sales. When
`the existence of the pharmacy and accusations that
`it was using fraudulent tactics to push Valeant's
`drugs came to light, the company was quick to break
`off the relationship.
`
`We're starting to understand how much that must
`have hurt. You see, Valeant had big plans for
`Philidor.
`
`Valeant had a sales plan dubbed the "Philidor
`strategy" to use the pharmacy and increase the
`volume of shipments for two of its drugs, Solodyn
`and Jublia. For Solodyn, an antibiotic to treat acne,
`the rebates and payments drove a recovery in
`flagging sales.
`
`Joe Papa, CEO of Valeant
`
`Reuters
`VRX Valeant Pharma I
`11.41 -0.24 (-2.10 %)
`
`The strategy is detailed in an internal Valeant
`presentation obtained by Business Insider. Dated
`August 2015, two months before the relationship
`with Philidor was exposed by the Southern
`Investigative Reporting Foundation, the
`presentation shows that the pharmacy's aggressive
`sales and marketing tactics all but completely
`supported growth in the two drugs — with Philidor moving $46 million of Jublia, a toenail fungus treatment, and
`$106 million of Solodyn in the first quarter of 2015.
`
`Disclaimer Get real-time VRX charts here »
`
`Valeant representative Elif McDonald would not comment on this story. The company's representatives at Sard
`Verbinnen, Chris Kittredge and Jared Levy, also did not respond to Business Insider's requests for comment.
`
`Key to Philidor's approach was virtually giving away millions of dollars worth of drugs and making sure that
`insurers and middlemen who approve insurance payments were getting fat rebates for securing payment for the
`drugs. While it worked, the cost was enormous — in Solodyn's case eating up close to three quarters of any new
`sales.
`
`http://www.businessinsider.com/leaked-valeant-documents-show-philidor-strategy-2016-11
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`Leaked Valeant documents show Philidor strategy for sales - Business Insider
`10/28/2017
`According to the document, "the Philidor strategy drove increases for both brands."
`
`Its effect was most dramatic with Solodyn, a drug whose sales had been declining for years. In 2011, the drug did
`$789 million in sales, according to Symphony Health Solutions. By 2014, after generic competition appeared, the
`number dropped to $480 million.
`
`Then in the first quarter of 2015, sales of Solodyn shot up 56% from the same time a year before, according to
`these documents. (For Jublia, that number was 188%.) The bulk of those sales — $106 million — came from
`Philidor, the presentation shows. Sales through other retail pharmacies fell to $66 million, nearly half what they
`were a year before.
`
`Valeant needed that help. Former CEO Michael Pearson was obsessed with constant sales growth, and
`shareholders were rewarding the company for achieving it. Pearson achieved this mostly with a string of
`acquisitions that added new products, but after going more than $30 billion into debt, that strategy was
`unsustainable.
`Worth it?
`
`Until October 2015, when short-seller Andrew Left of Citron Research wrote a report accusing the company of
`accounting malfeasance, Valeant had not told shareholders anything about Philidor, even though it was folding
`Philidor's accounting into Valeant's own books. The Wall Street Journal later uncovered that Valeant employees
`worked at Philidor under pseudonyms.
`
`After questions about Philidor's sales tactics arose, investors abandoned the former Wall Street darling stock in
`droves. Valeant's share price plunged around 90% from its 2015 high.
`
`Three years in the life of Valeant.
`
`Business Insider
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`Leaked Valeant documents show Philidor strategy for sales - Business Insider
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`That was just the monetary cost. Now the federal government is conducting a criminal investigation into alleged
`fraud at Philidor. Pearson and Valeant's former CFO, Howard Schiller, are also being investigated criminally for
`their alleged involvement with Philidor, Bloomberg News reported last week.
`
`While Valeant has said that Philidor was "less profitable than traditional channels," the "Philidor strategy" shows
`that Valeant was subsidizing enormous amounts of sales through the pharmacy, and the presentation includes a
`lengthy discussion of steps it could take to cut down on the freebies.
`
`"Solodyn and Jublia sales grew 56% and 188% overall, but most of Solodyn's growth was subsidized (free)
`through Philidor," the presentation said.
`
`Valeant's outgoing CEO, Michael Pearson, left, and former CFO Howard Schiller are sworn in before the
`Senate Special Committee on Aging.
`
`AP Images/Manuel Balce Ceneta
`
`An alternative-fill style
`
`Philidor ended up giving away millions of dollars worth of Solodyn and Jublia because healthcare payers —
`insurance companies and pharmacy benefit managers — wouldn't pay for them. That could be because the drugs
`were too expensive to be on their plans, or because Philidor was sending too much medication out over a given
`period of time.
`
`When that happened, Valeant would eat that cost. The company referred to those losses as "alternative fills," and
`in the presentation refers to them as a form of subsidy to support sales.
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`Leaked Valeant documents show Philidor strategy for sales - Business Insider
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`The company wanted to lower the number of alternative fills — the number of drugs it would send that weren't
`being paid for. This was a problem for Valeant, and Umer Raffat of Evercore ISI noticed something wonky was
`going on with Jublia. Raffat asked Pearson about it on Valeant's first-quarter conference call in April of that year.
`
`"Mike, my last question — Jublia is up 87% quarter-on-quarter on [total prescriptions]. I think the sales were up
`about 20%-ish. So just wanted to understand trends there," he said.
`
`Pearson responded by blaming this problem on growing pains, even though Valeant acquired Jublia in 2008. He
`said there was too much inventory hanging around but that the company would take care of this problem in no
`time.
`
`"In terms of Jublia, in our prepared remarks, I think we mentioned that the difference between the growth in
`scripts and the growth in revenues is basically what's out there in the channel and inventory," Pearson said.
`
`"So those have all been reduced. And our sales, especially into specialty pharmacy, specialty pharmacies, we have
`our inventory levels very, very low. So well below two weeks. So I think going forward, what you'll see is which is
`the important thing, is the growth in script trends and the growth in Jublia revenues will match dollar to dollar
`from Q2 going forward."
`
`But it didn't. That's what the presentation discusses — how to lower the number of AFs by getting insurers and
`pharmacy benefit managers to pay for more product, and get doctors to prescribe it so that insurers would cover
`it.
`Taking the hit
`
`These subsidies, which Valeant describes as "free goods that are fully reimbursed," accounted for 32% of Solodyn
`gross sales and 14% of Jublia gross sales in the first quarter. Industry experts Business Insider consulted consider
`that to be high.
`
`And apparently so did Valeant.
`
`The company wanted to fatten those margins by getting drugs paid for even when it had so-called prior
`authorizations. That's when doctors are required to get approval from insurers and/or pharmacy benefit
`managers ahead of time to prescribe a specific drug. Prior authorizations made it harder for Valeant to sell its
`expensive drugs, and the company was well aware of that.
`
`"To be successful through Philidor, products need to be covered (without strong PA); however, the current
`managed care and PA execution strategy has not consistently delivered this," the presentation said.
`
`The company thought of a couple of ways to fix this problem. The most important way was to straight-up pay a
`bigger rebate to payers — the insurers and the pharmacy benefit managers — for relaxing the prior authorizations
`for Jublia and Solodyn, and getting them to cover the drug.
`
`Under a slide titled "Opportunities to optimize [Managed Healthcare Companies] strategy based on analysis on
`both Solodyn and Jublia," the Valeant presentation reads: "Based on the wide difference in value of covered and
`non-covered Rx through Philidor, it is imperative to tightly coordinate MHC and Philidor strategy."
`
`For every 10% increase in "covered lives" taking the drugs, margins would improve by 11%, according to Valeant's
`calculations. In other words, for every 10% of prescriptions that insurers pay for, their margins would improve by
`11%.
`
`That's why Valeant said that it needed to "invest in failed PAs to obtain covered [total prescriptions] in return,
`based on the share of these failed PAs that get approved."
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`YouTube
`
`And the reality was that Valeant was already paying them a pretty penny. Some were getting reimbursed up to
`80% of the cost of Solodyn, and 36% of the cost of Jublia.
`
`Jublia paid out fewer rebates because it's a drug that still has exclusivity. All told, 7.5% of Jublia gross sales went
`to payers and/or their middlemen in the first quarter of 2015, the documents show.
`
`Solodyn was another story. It's an acne drug with tons of cheaper competitors, so Valeant had to really sweeten
`the pot to get payers to accept it. As such, according to the documents, 46% of Solodyn gross sales went to payers
`and the middlemen that manage formularies — the list of drugs that your insurer will pay for — and that still
`wasn't enough to convince payers to shell out for Solodyn all the time.
`
`Valeant's solution to this problem was to just pay these people even fatter rebates to get them to drop prior
`authorizations. Or, in its own words, it was willing to "explore tiering of rebates proportional to PA strength to
`incent payers to adopt less stringent PAs."
`
`A bunch of the slides in the presentation were about how to ensure that sales were directed at friendly payers,
`how to ensure payers stayed friendly, and how to make "outliers" — payers who were not processing payment for
`the drugs — come into the fold.
`
`We should also note that Valeant also saw the sheer volume of drugs it was moving through Philidor as a
`marketing tool to make doctors aware of the pharmacy's existence. Then, ideally, it would encourage payers to
`cover the drugs for their patients.
`
`"One rationale for subsidizing scripts is to attract prescribers who have more covered than uncovered patients,
`however ~$13M of [alternative fill] subsidized scrips for prescribers that have a poor patient mix and a low
`likelihood of profitability," the documents read.
`Big deal drugs
`
`By the time these documents were created in late 2015, Jublia had become Valeant's second-biggest drug in
`terms of revenue generation. It was its top dermatology drug. (Solodyn came in second in dermatology and
`seventh overall.)
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`And according to a memo Pearson sent a
`month before Philidor was discovered, the
`company intended for the explosive growth of
`the two drugs to continue.
`
`"Dermatology, Ophthalmology RX and
`Dentistry Rx 2016 revenue is expected to
`represent approximately 20% of revenue and,
`across these businesses, our teams have
`delivered over 30% script growth year to date,"
`it said. "We expect continued double-digit
`growth for the foreseeable future given the
`strength of our brands (e.g., Jublia, Prolensa,
`Retin-A Micro franchise, Solodyn)."
`
`That's why after Philidor was put out to
`pasture, Wells Fargo analyst David Maris wrote
`to his clients he thought that Philidor played a
`huge hand in the growth of these products. However, because Philidor's accounting wasn't broken out, we
`couldn't know. We should note that the Jublia revenue he cites for Q1 2015 is close, but does not exactly match
`the number in the documents viewed by Business Insider.
`
`Valeant
`
`From Maris (emphasis ours):
`
`"According to Valeant, Jublia revenue increased to $106 million in Q3 2015 from $62 million in Q1 2015,
`making it the company's second-largest revenue generator in Q3 2015. We believe that a
`substantial portion of Jublia’s growth was fueled by Philidor and anticipate a significant negative
`impact to Jublia from the termination of Philidor and shift to Walgreens. While Jublia has patent protection
`into 2030, its exclusivity ends in 2019, and we believe competitors may be keen on introducing a less
`expensive version of the drug."
`
`In its latest earnings report, in August, Valeant blamed a decline in product sales, in part on "lower volumes in
`dermatology (mainly attributable to Jublia, Solodyn and Ziana)." It now distributes those drugs through a deal
`with Walgreens — a deal that took some time to get off the ground.
`
`In the second quarter of 2016, Jublia ranked 16th among Valeant's top brands, while Solodyn ranked 29th.
`Organic growth
`
`The reason Wall Street loved Valeant — why it loved its CEO Michael Pearson — is that he delivered consistent
`top-line growth quarter after quarter. He called it "organic growth," and when that siren song combined with the
`accounting synergies of his serial acquisition strategy, Pearson was able to seduce some of the smartest investors
`in the game.
`
`Valeant's stock soared on this story. In the summer of 2015, it peaked at around $257 a share, despite the
`protests of short-sellers who accused the company of using aggressive accounting to hide losses.
`
`What these documents show us is that growing sales volume at any cost was also very much a part of Valeant's
`business strategy. It wasn't just the price hikes that made Valeant so hated in Washington.
`
`Regardless of where it came from, this "growth" was intended to drive Valeant's share price, and that share price
`was making Pearson and his investors very rich. In fact, in 2015, Pearson agreed to forgo a salary and receive
`compensation only in the form of cash and stock tied to performance.
`
`While the stock was riding high, this was all very well and all very Wall Street and all very capitalist indeed.
`
`Until it wasn't.
`
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`Business Insider's Lydia Ramsey also contributed to this report.
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