Valeant, Philidor RX, and the Uninformed Attack on
`Specialty Pharmacy
` www.drugchannels.net /2015/10/valeant-philidor-rx-and-uninformed.html
`
`Yesterday, Valeant Pharmaceuticals finally explained its complex interactions with
`Philidor RX Services, a so-called “specialty pharmacy” that has a previously-
`undisclosed financial relationship with Valeant. Click here to see the full 89-slide
`webcast deck. Valeant has been labeled the “Enron of the pharmaceutical industry,”
`although I don’t know if any of the alleged shenanigans are true.
`
`Unfortunately, the controversy has tarred the entire specialty pharmacy industry
`along with manufacturers’ legitimate specialty pharmacy relationships. Below, I
`explain why Philidor RX is not a specialty pharmacy. I also suggest what the
`Valeant-Philidor relationship could mean for payer surveillance of manufacturers’
`copay offset programs.
`
`I believe (hope?) that over time, everyone will recognize the differences between a true specialty pharmacy and a
`company such as Philidor. Meanwhile, expect greater scrutiny of manufacturers’ specialty channel strategies.
`Smaller independent specialty pharmacies should also expect greater oversight, as manufacturers and payers work
`to validate the business operations of their trading partners.
`
`OUCH!
`
`Here’s the inflammatory report, written by well-known short-seller Citron Research, that sent Valeant’s stock
`tumbling last Wednesday: Valeant: Could this be the Pharmaceutical Enron? Subtle, right?
`
`The stock market went bananas. Valeant’s stock dropped by almost 50% last week, before rebounding slightly. As of
`yesterday’s close, its stock is still down a whopping 38% in the past 6 trading days.
`
`Alas, the controversy launched a slew of poorly researched news stories filled with anti-specialty-pharmacy rhetoric.
`Here’s a small sample from last week:
`
`“…what's really at the heart of the accusations against Valeant is the use of a new, shadowy segment within
`the pharmaceutical industry: specialty pharmacies.” (The Fraud Allegations Against Valeant Exposed An
`Industry Secret That's Going To Infuriate Washington, Business Insider
`
`“Use of specialty pharmacies seems to have become a new way of trying to keep the health system paying
`for high-priced drugs.” (Drug Makers Sidestep Barriers on Pricing, The New York Times)
`
`“A short-selling research firm has accused Valeant of using Philidor and other specialty pharmacies to
`orchestrate fraudulent transactions and thus inflate its financial results.” (Valeant’s Disclosure: Why Now?,
`The Wall Street Journal)
`
`“Specialty pharmacies are a valuable part of the system … but they also open up yet another loophole with
`the potential for conflicts of interest.” (The bad boys of pharma: Investors love them — until cracks in the
`model appear, Financial Post
`
`Loophole? Fraudulent? Shadowy segment?!? Yikes!
`
`Those quotes make specialty pharmacies sound like they are barely one step above heroin dealers. The quotes
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`ACRUX DDS PTY LTD. et al.
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`EXHIBIT 1530
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
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`also imply—inaccurately—that every pharmaceutical manufacturer utilizing a specialty pharmacy networks is trying
`to game the system or trick payers. Oy.
`
`Late yesterday afternoon, the National Association of Specialty Pharmacy (NASP) emailed a statement to the few
`thousand people on its email list. But the damage is done.
`
`More bad news keeps coming. In the past few days, journalists have unearthed even more alleged problems at
`Philidor. Check out this troubling Wall Street Journal investigative article: Valeant and Pharmacy More Intertwined
`Than Thought. It alleges that Valeant employees used bogus email names while secretly working at Philidor. On
`yesterday’s call, Valeant announced that a new Board committee would be reviewing the company’s relationship
`with Philidor Rx Services and other pharmacies.
`
`MY $0.02: PHILIDOR IS NOT A SPECIALTY PHARMACY
`
`Philidor Rx is a manufacturer-controlled mail pharmacy that dispenses primarily Valeant products. It was founded in
`2013 and now employs more 600 people. Philidor also provides copay card administration services for Valeant.
`
`This brief description should be sufficient to disqualify Philidor RX from being designated a “specialty pharmacy.” But
`given the media’s uninformed perspective, we must stipulate precisely why Philidor Rx is not part of the specialty
`pharmacy industry.
`
`1. Products. Most people in healthcare understand that specialty pharmacies focus on self-administered specialty
`drugs covered under a patient’s pharmacy insurance benefit. Specialty drugs are almost always highly differentiated
`brand-name drugs for patients undergoing intensive therapies for such chronic, complex illnesses as cancer,
`rheumatoid arthritis, multiple sclerosis, and HIV.
`
`Philidor Rx, however, focuses on Valeant’s comparatively undifferentiated traditional drug portfolio. According to
`Valeant, Philidor’s dispensing activity focused primarily on Valeant’s own dermatology products such as Retin-A-
`Micro and Solydyn. For Valeant’s Jublia toe fungus medicine, 44% of revenues flowed through Philidor.
`
`2. Revenue Recognition. Manufacturers usually recognize revenues when a product is sold to a pharmacy or to a
`wholesaler for resale to a pharmacy. Before December 2014, Valeant accounted for its sales to Philidor in this way.
`
`In December 2014, however, Valeant executed a purchase option and began consolidating Philidor’s revenues.
`That's why Valeant doesn’t recognize revenue until the product is dispensed, at which point Valeant books the net
`prescription revenues. Valeant also consolidates the revenues of other, unnamed pharmacies in Philidor’s “network
`of pharmacies” located in California, Florida, New Jersey, South Carolina and Texas.
`
`Valeant also revealed that Philidor dispenses Valeant medications before adjudication of the reimbursement is
`finalized, so Philidor takes on risk for non-reimbursement. As far as I know, unaffiliated pharmacies always require
`the payer’s confirmation of coverage and payment before dispensing a prescription.
`
`3. Sources of Pharmacy Profits. A pharmacy earns the majority of its profits from the spread between (1) the
`drug's acquisition cost and (2) the reimbursement from the payer or consumer. Pharmacies may also receive a
`minority of their profits from dispensing fees charged to payers and services fees charged to manufacturers. By
`contrast, Philidor Rx is now effectively operating a direct-selling pharmacy for Valeant products, so the concept of
`spread does not apply.
`
`4. Ownership. No other pharma manufacturer owns or operates a significant specialty pharmacy. Instead, the
`pharmacies that dispense specialty drugs are owned and operated by such organizations as pharmacy benefit
`managers, health plans, independent pharmacies, retail drugstore chains, health plans, pharmaceutical
`wholesalers, physician practices, and hospital systems. See Section 3.3. (page 44) of our 2014-15 Economic Report
`on Retail, Mail, and Specialty Pharmacies.
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`On page 16 of its slide deck, Valeant calls out AbbVie’s Pharmacy Solutions business as an example of a
`manufacturer-owned specialty pharmacy. The Pharmacy Solutions website, however, clearly states that it is an
`AbbVie company. Last week, AbbVie felt compelled to remind analysts that “revenue from Pharmacy Solutions is
`less than 0.2% of our total U.S. sales.” Other manufacturers also issued statements clarifying that they use only
`unaffiliated pharmacies.
`
`REIGNITING THE COPAY OFFSET CONTROVERSY
`
`Valeant Risks Clash With Insurers Amid Scrutiny , from Toronto’s The Globe and Mail, provides a reasonably concise
`summary of how Philidor and Valeant worked:
`
`“Philidor helps boost Valeant’s profit in part by filling its brand-name drug prescriptions, where an
`independent pharmacy might substitute a less expensive alternative or generic drug, analysts say.”
`
`Put another way, it appears that Valeant used Philidor Rx to support its very aggressive copay offset programs.
`
`As regular Drug Channels readers know, PBMs and third-party payers generally hate copay offset programs for non-
`specialty drugs. They argue that copayment offset programs interfere with benefit plan design, reduce generic
`substitution, and raise plan sponsors’ costs. Four years ago, I highlighted the controversy in Wake-Up Call for Co-
`pay Cards and PBMs Launch a New Attack on Copay Cards.
`
`At the same time, payers are figuring out how to exploit manufacturers’ copay programs, by:
`
`Offering benefit designs with pharmacy deductibles, so that pharmaceutical manufacturers end up paying full-
`price for their own products. See How Pharmacy Benefit Deductibles Stimulate Manufacturer Copay Program
`Spending.
`
`Using high coinsurance rates for fourth-tier specialty drugs, thereby forcing manufacturers to cover patients’
`large out-of-pocket costs. See How the Fourth Tier Coinsurance Boom Drives Copay Offset Programs.
`
`Valeant’s approach, however, will create greater payer scrutiny for copay cards associated with Valeant products.
`I’m sure that prescription claims from Philidor and other Valeant pharmacies will also be examined much more
`closely by third-party payers. Going forward, that scrutiny may end up having the biggest impact on Valeant’s future
`sales growth.
`
`In the meantime, specialty pharmacies and their manufacturer partners should definitely care about their bad
`reputation.
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