Accusations highlight special pharmacies - Business Insider
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`http://www.businessinsider.com/valeant-accusations-highlight-special-p...
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`LINETTE LOPEZ
`OCT. 21, 2015, 6:17 PM
`
`Whether you believe accounting fraud
`allegations levied against pharmaceutical-firm
`Valeant or not, one thing is certain.
`
`The pain isn't over — not for Valeant, not for
`any company in the pharmaceutical industry.
`
`That's because 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.
`
`Specialty pharmacies are used by some big
`drug companies to administer and distribute
`their products. They fill prescriptions and, in
`most cases, provide administrative services for
`copay cards.
`
`Reuters
`
`Here is how analysts at Raymond James explained the role played by specialty pharmacies: 'The existence of
`these “pharmacies,” or prescription fulfillment operations, are largely intended to make sure that prescriptions
`are dispensed to patients by doctors that want these patients to receive the respective pharmaceuticals and can
`include claims support and adjudication, prescription fulfillment, and a host of other IT and logistics support.'
`
`If a drug company has a specialty pharmacy at its disposal, it gets more of its product sold. Once the product is
`sold, it then tries to get whatever it can from the insurance company. Whatever it can't collect, it takes as a hit.
`The volume of product sold offsets the loss.
`
`Here's how Bernstein Research explained it in a recent note [emphasis theirs]: "Is this not illegal or at least
`immoral? The core services provided by specialty pharmacies are not illegal. As for immoral — it's a matter of
`perspective.
`
`"The payer (and employer) intentions are being undone which can be viewed as wasting precious resources by
`taking advantage of an inefficiency in the system. The counter view is that patients get to use the drug the
`physician prescribed and avoid unnecessary hassle. One investor called us a 'socialist' for suggesting system
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`ACRUX DDS PTY LTD. et al.
`
`EXHIBIT 1548
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
`
`

`

`Accusations highlight special pharmacies - Business Insider
`
`http://www.businessinsider.com/valeant-accusations-highlight-special-p...
`
`benefit should sometimes come first."
`
`The advantage for the drug company here is clear, and that's why big drug companies don't really talk about their
`relationships with specialty pharmacies.
`
`Unless, of course, those relationships are under fire. And that's what we have here, an industry secret under fire.
`
`Investing.com
`
`On Monday, Valeant held its third-quarter earnings call and disclosed that it has a contractual relationship with a
`special pharmacy called Philidor. CEO Michael Pearson said that it never disclosed the relationship before
`because the relationship is considered a competitive advantage within the industry.
`
`But ever since the government started scrutinizing Valeant for its pricing practices last month, the press and the
`Feds started asking questions. That's why Pearson started talking about Philidor.
`
`"We have a contractual relationship with Philidor, and late last year we purchased an option to acquire Philidor if
`we so choose," said Pearson. "Given accounting rules, we consolidate Philidor's financials. Inventory held at
`Philidor remains on Valeant's books, and is not included in the specialty pharmacy-channel inventory."
`
`Remember those accounting rules, because that's where short-selling-firm Citron Research comes in. On
`Thursday, Citron published a report accusing Valeant of invoicing a specialty pharmacy within Philidor's
`network, R&O, for selling $69 million worth of product R&O claims it never received or sold.
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`Accusations highlight special pharmacies - Business Insider
`
`http://www.businessinsider.com/valeant-accusations-highlight-special-p...
`
`Michael Pearson, chairman of the board and chief executive officer of Valeant Pharmaceuticals
`International Inc.
`
`REUTERS/Christinne Muschi
`
`In levying this accusation, Citron cites a filing in a California court in which R&O says it has no idea what Valeant
`is billing it for.
`
`Here's an excerpt from the filing:
`
`On September 4, 2015, R&O received a letter from Robert Chai-Onn, Valeant's Executive Vice President,
`Chief Legal Officer and General Counsel. In the letter, which was the first correspondence that R&O had ever
`received directly from Valeant, Mr. Chai-Onn claimed that R&O, a small licensed California pharmacy, owed
`Valeant over $69,000,000.
`
`However, R&O has never received a single invoice from Valeant in any amount and until September 4 had
`never received a single demand for payment from Valeant. R&O has requested copies of the invoices, but to
`no avail. Indeed, it seems that Valeant has no evidence whatsoever to back up its claims.
`
`Therefore, R&O believes that one of two things must be true:
`
`1. Valeant and R&O are victims of a massive fraud perpetuated by third parties; or
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`Accusations highlight special pharmacies - Business Insider
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`http://www.businessinsider.com/valeant-accusations-highlight-special-p...
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`2. Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others.
`The purpose of this action is for R&O to get to the bottom of this, avoid accrual of avoidable damages, if any,
`and secure an early adjudication without waiting until Valeant sees fit to file suit.
`
`In a statement, a Valeant representative "categorically denied" Citron's report. But it did not directly address
`R&O's court filing, which also alleged fraud.
`
`It said only the following on R&O:
`
`The $69 million at wholesaler acquisition cost of products shipped by Valeant to R&O were not recorded as
`revenue to Valeant when shipped to R&O. When R&O dispensed those products Valeant recognized the net
`realized amount due from patients and payors (approximately $25 million) and reduced the associated
`inventory from Valeant's balance sheet. In this case, we estimate the net amount of revenue for the $69
`million at WAC would be approximately $25 million.
`
`At best, this mess is just a misunderstanding between companies with tons to keep track of — it's some lost
`paperwork, some forgotten product.
`
`Either way, what all of this does is highlight how little we know about how these companies work together within
`an industry that means the difference between life and death for millions of people.
`
`Valeant's accounting practices have been a target for
`short-sellers for years now, ever since Kynikos
`Associates founder Jim Chanos accused the
`company of using aggressive, acquisition-driven
`accounting to hide its lack of organic growth.
`
`Citron's fraud accusation, though, is about more
`than accounting. It's about pricing, and that's what
`everyone from Democratic presidential candidate
`Hillary Clinton to US Sen. Claire McCaskill (D-
`Missouri) have been coming down on big drug
`companies for.
`
`Since specialty pharmacies give big drug companies
`the ability to bypass insurance companies looking to
`cut costs, analysts see them as a potential way costs
`are driven up.
`
`US Sen. Claire McCaskill (D-Missouri).
`
`Mark Wilson/Getty Images
`
`In other words, Citron's report got Wall Street scared that the government — already angry and asking a load of
`questions about pharmaceutical pricing — would start looking into these special pharmacies.
`
`Traders sold Valeant until it was down almost 19% for the day even with a boost from billionaire investor Bill
`Ackman, the company's third-largest shareholder.
`
`In fact, when Citron's accusations came out, big drug companies got hurt across the board as the market tried to
`figure out which companies were vulnerable.
`
`Allergan, a $101 billion firm Valeant once targeted for takeover, had to release a statement saying that it doesn't
`use specialty pharmacies when its stock dipped around 7% during the trading session. It later recovered to close
`the day down about 1.7%.
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`Accusations highlight special pharmacies - Business Insider
`
`http://www.businessinsider.com/valeant-accusations-highlight-special-p...
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`Endo International and Horizon Pharma also put
`out statements clarifying their relationships with
`specialty pharmacies.
`
`So the specialty pharmacies are an issue that will
`keep Valeant, and the entire industry, in the
`government's crosshairs until it figures out how
`they work.
`
`"Our view is that like any other commercial practice,
`pharmacy practices can also cross the line, but
`presumably this risk is on a company-by-company
`basis," Bernstein wrote in its note. "That said, two
`enhanced concerns were flagged that we can't argue
`against — (i) specialty pharmacy is a 'young'
`industry segment and thus may be under regulated
`(this is still a pharmacy, though, and those are
`regulated) and (ii) in-house pharmacies are riskier
`for the owner than arms-length relationship with a
`separate party. Fair."
`
`Bill Ackman.
`
`Bloomberg, screenshot
`
`×
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