[1]thx to chris potter on flickr creative commons
The Valeant Pharmaceuticals story is going from bad to worse.
The latest installment involves accusations by an influential short seller that the drug maker, which is already under investigation for its pricing and patient assistance programs, is exploiting ties to a specialty pharmacy to inflate revenue.
The claim was made in a report issued this morning [2] by Citron Research, which describes a complicated process used by Valeant to ensure prescriptions are filled. At one point, the report, which likened the Valeant saga to the Enron scandal more than a decade ago, wiped out nearly $20 billion in the value of Valeant stock. The shares already lost one third of their value this year
Valeant has been under a microscope ever since this story detailed [3] its penchant for jacking up prices of newly acquired medicines. The tactic is actually part of a well-honed growth strategy Valeant employs in lieu of investing in R&D to generate sales and profits.
The disclosure put Valeant squarely in the middle of the national debate over prescription drug costs. Lawmakers are investigating. Presidential aspirants are decrying its business practices. And just last week, federal prosecutors in New York and Massachusetts issued subpoenas [4] for information about patient assistance programs and product distribution.
But the Citron report has ratcheted up the intrigue.
Led by short seller Andrew Left, Citron alleged Valeant uses specialty pharmacies – notably, Philidor Rx Services – to generate “phantom sales” by pushing more medicines through distribution channels. The bottom line, Citron wrote, is that “the whole thing is a fraud to create invoices to deceive the auditors and book revenue.”
Valeant called the report “erroneous” and maintained its dealings with specialty pharmacies are proper. “We categorically deny the allegations made in the Citron Report,” Valeant said in a statement [5]. “Citron’s false and misleading statements about Valeant appear to be an attempt to manipulate the market in an effort to drive down Valeant’s stock price.”
The latest allegations made by Citron are complicated. But they basically center on the use of specialty pharmacies, which are typically used to distribute costly medicines for hard-to-treat diseases. These pharmacies focus on medicines that require special storage or assisting with patient education.
More recently, drug makers are using these pharmacies for all types of medicines.
Why? As The New York Times noted [6], the practice is used by some drug makers to deflect complaints about high prices and efforts by insurers to switch patients to less costly medicines. Basically, the specialty pharmacy ensures speedy delivery. Meanwhile, the drug maker subsidizes patient co-pays. As a result, prescriptions are cheaper and obtained faster. This can make it easier to prop up prices.
Drug makers “hire the services of a specialty pharmacy to ensure all patients get the drug,” Sanford Bernstein analyst Ronny Gal wrote in a research note. “This allows the drug company to essentially negate the impact of [an] insurer’s formulary copay and coinsurance.”
Valeant, however, insisted there is no sales benefit from holding inventory at specialty pharmacies and that sales are only booked when medicines are dispensed to patients. The drug maker added that it has a contractual relationship with Philidor and properly accounts for all sales to the specialty pharmacy, as well as any inventory held by Philidor.
The Citron report also explored the relationship between Valeant and Philidor, which Valeant earlier this week disclosed it has an option to acquire and had begun consolidating Philidor financial results in its own reports. The details encompass another company, R&O Pharmacy, which Valeant is suing [7] for $69 million in unpaid invoices.
The short seller links to a more copious examination of Philidor on a site called the Southern Investigative Reporting Fund [8]. The piece also notes that Philidor, R&O, and some other pharmacies all share the same customer service phone number [2], suggesting there are corporate connections. Valeant, however, maintained R&O is among the pharmacies that Philidor actually supplies with product as part of a pharmacy network.
Whether any of this will haunt Valeant is unclear. Len Yaffe, an investor at StocDoc Partners, who is short on Valeant, told Reuters [9] he is uncertain. But he cautioned that any effort to rely on phantom sales to boost revenues underscores widespread concerns about Valeant’s ability to generate real sales growth in an increasingly hostile pricing environment.