10/31/2017
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`Valeant's Walgreens Woes Have No Easy Fix - Bloomberg Gadfly
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`BloombergGadfly 5
`
` Max Nisen
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`Follow @MaxNisen
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`June 9, 2016 10:31 AM EDT
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`s
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`With Valeant, things can always be worse, and the past is never buried.
`
`For example, Valeant's controversial relationship with specialty pharmacy Philidor, which ended last year, has come back to haunt the
`company. This time, it's not the accounting issues and allegations of misconduct that led to the breakup. It's the way Valeant tried to fill
`the Philidor-sized hole in its drug-distribution plan: the desperate deal negotiated by ex-CEO Mike Pearson for Walgreens to sell Valeant's
`dermatology and eye drugs at a discount.
`
`Valeant is losing money on sales of some of its drugs through Walgreens, according to its earnings call Tuesday. Mere months after the
`deal started, new CEO Joe Papa wants to rewrite it or get out, according to the Financial Times.
`
`But the deal isn't just disappointing because Pearson negotiated poorly, though he did. It's flopping because many of Valeant's drugs are
`old, expensive, or easily substitutable. Without Philidor doing paperwork for doctors and fighting payers for reimbursement, this glaring
`flaw is starting to show, big time. There's no easy fix for that.
`
`One of the worst parts of Valeant's awful quarterly earnings report Tuesday was the 43 percent revenue drop from a year ago, to $228.6
`million, in its U.S. dermatology business. The decline was driven partly by struggles with the Walgreens deal. The unit made up about 24
`percent of Valeant's U.S. sales and 17 percent of total sales at its revenue peak in the third quarter of 2015. It has since fallen to 10 percent
`of total sales. The company's prescription eye-drug business, which accounts for about 4 percent of total sales, is also covered by the
`Walgreens deal. Its sales fell 30 percent to $90.7 million in the quarter.
`
`Valeant's dermatology drug revenue is falling rapidly and a turnaround will be tough.
`
`Valeant dermatology revenue
`
`$ 500 million
`450
`400
`350
`300
`250
`200
`150
`100
`50
`0
`
`Source: Company
`
`Mar '15
`
`Jun '15
`
`Sep '15
`Date
`
`Dec '15
`
`Mar '16
`
`Pearson pitched the Walgreens deal as the company's salvation, saying it would restore the business to growth based on sales volume
`instead of controversial price hikes. Valeant's stock price jumped 16 percent on the announcement. Pearson said the deal "more than
`replaces Philidor" as a distribution strategy.
`
`But the deal was lopsided in Walgreens' favor. Valeant pays the pharmacy a fee for offering its drugs, whether an insurer ends up paying
`for them or not. So if an insurer rejects a prescription after it is dispensed, then Valeant may never get reimbursed, apparently paying
`Walgreens for the pleasure. About a quarter of Valeant prescriptions being dispensed through Walgreens go out without insurer approval,
`according to the FT.
`
`Along with higher spending, Valeant's fights with insurers, its inability to increase prices, and its Walgreens disappointment are crushing
`operating margins, which are down more than 20 percent from a year ago.
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`https://www.bloomberg.com/gadfly/articles/2016-06-09/valeant-walgreens-woes-have-no-easy-fix
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`ACRUX DDS PTY LTD. et al.
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`EXHIBIT 1634
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`IPR Petition for
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`U.S. Patent No. 7,214,506
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`Stepping Down
`Marginal
`Valeant's Walgreens Woes Have No Easy Fix
`By Max Nisen
`

`

`10/31/2017
`
`Valeant's Walgreens Woes Have No Easy Fix - Bloomberg Gadfly
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`Valeant's operating margins are plunging as new costs run into lower drug prices.
`
`Valeant operating margins
`
`35%
`
`30
`
`25
`
`20
`
`15
`
`10
`
`05
`
`2014-03-31
`
`6/31/2014
`
`9/31/2014
`
`2014-12-31
`
`2015-03-31
`Date
`
`Source: Bloomberg Intelligence
`
`6/31/2015
`
`9/31/2015
`
`2015-12-31
`
`2016-03-31
`
`Expensive Valeant drugs have seen their revenue plummet in part because insurers have balked. Sales of $1000-a-vial toe-fungus drug
`Jublia have fallen 37 percent in the past year, for example. Jublia prescriptions have recovered only modestly from a steep plunge after
`Valeant a cut ties with Philidor last fall. Whether it's reimbursement troubles, reputation damage from the public controversy over
`Valeant's pricing practices, a slow ramp-up, or all of the above, the Walgreens deal doesn't seem to be providing the promised volume
`boost for Valeant's drugs yet.
`
`In fact, the company said the average selling price for its medicines is far lower at Walgreens than it is anywhere else. So ramping up sales
`there might actually hurt margins even more, especially compared to what the company was used to with Philidor.
`
`Valeant's Walgreens deal discounts have modestly boosted Jublia's retail prescriptions. But the pact has
`not made up for the loss of Philidor's mail order business, by any stretch.
`
`Jublia weekly retail prescriptions
`
`Jublia weekly mail order prescriptions
`
`
`
`16,000
`14,000
`12,000
`10,000
`8,000
`6,000
`4,000
`2,000
`0
`Jun
`'14
`
`Aug
`
`Sep Oct
`
`Nov Dec Jan
`'15
`
`Feb Mar Apr May
`
`Jun Jul
`
`Aug Sep Oct
`
`Nov Dec Jan
`'16
`
`Feb Mar Apr May
`
`Source; Bloomberg Intelligence/Symphony
`
`Date
`
`Insurers and pharmacy benefit managers have gone out of their way to scrutinize Valeant's products -- which are often expensive, even
`with the Walgreens discount -- and push patients to cheaper or generic alternatives. Its dermatology drugs are a particular target. Valeant
`said it plans to contract with an unnamed third party to help it deal with reimbursements from payers.
`
`Valeant's fix in the past was Philidor, which was said to be extremely aggressive about getting reimbursement. That helped fuel Valeant's
`ability to continually raise prices. Now Valeant's practices are in a very public spotlight, and it's not clear how a by-the-book third party
`can get around increasingly sophisticated, aggressive, and targeted insurer restrictions.
`
`It's also hard to see what kind of leverage Papa has to modify the 20-year deal with Walgreens, or if he'll legally be able to get out of it.
`
`A better solution might be focusing on drugs that can grow sales organically and aren't routinely rejected by insurers. But it's a little late
`for Valeant to go that route.
`
`This column does not necessarily reflect the opinion of Bloomberg LP and its owners.To contact the author of this story:
`Max Nisen in New York at mnisen@bloomberg.net
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`https://www.bloomberg.com/gadfly/articles/2016-06-09/valeant-walgreens-woes-have-no-easy-fix
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`The Fungus Among Us
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`10/31/2017
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`Valeant's Walgreens Woes Have No Easy Fix - Bloomberg Gadfly
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`To contact the editor responsible for this story:
`Mark Gongloff at mgongloff1@bloomberg.net
`
`https://www.bloomberg.com/gadfly/articles/2016-06-09/valeant-walgreens-woes-have-no-easy-fix
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