J. Michael Pearson, CEO of Valeant.
Photograph by Kevin Van Paassen — Bloomberg via Getty Images
By Laura Lorenzetti
October 21, 2015

Valeant Pharmaceuticals is trading at a 52-week low after its stock fell as much as 39% Wednesday before the company briefly halted trading following a scathing investigation into the drug maker’s use of specialty pharmacies.

A report by Citron Research, run by activist short-seller Andrew Left (who is actively shorting Valeant), revealed that Valeant uses a specialty pharmacy, Philidor, to establish “an entire network of phantom captive pharmacies.” This network allegedly, according to Citron, implies sales of Valeant’s drugs that are sitting inventory. Citron dubbed Valeant “the pharmaceutical Enron.”

CEO J. Michael Pearson commented briefly on Philidor during the company’s third-quarter earnings call on Tuesday, mentioning that Valeant has an option to acquire Philidor. Valeant called Citron’s claims “erroneous” in a press release and said that all sales “are recorded only when the product is dispensed to the patient.”

Specialty pharmacies, like Philidor considers itself, are a unique distribution method in the medical space. These outlets are exempt from reporting their sales to IMS Health, which tracks drug sales for the industry. Specialty pharmacies were designed to help distribute complex drugs, like injections and ones requiring constant refrigeration.

However, drug makers have started to use specialty pharmacies as a way to encourage the use of standard, higher-priced drugs that insurance companies may be unwilling to cover. Instead of distributing injections for cancer or multiple sclerosis, companies like Valeant are using them for medicines for less severe ailments like joint pain and acne.

“What was started as administering complex, costly drugs has been co-opted as a sales/marketing tool to drive the growth of minor differentiation standard retail drugs,” Ronny Gal, an analyst at Bernstein, wrote in a note reported by the New York Times.


Drug makers dub specialty pharmacies as patient access programs. Instead of going to your corner pharmacy, a patient’s doctor submits the prescription directly to a mail-order pharmacy, which deals directly with the insurance company. If an insurance refuses to cover the drug because of its high cost (and an available, equivalent generic), the patient already has the medicine and the manufacturer typically absorbs the cost.

Drug makers say this approach ensures patients are able to get the drugs they need. Insurers, on the other hand, say it encourages use of high-priced drugs when there are cheap equivalents available, thereby increasing overall medical spending.

This isn’t the only snag Valeant’s hit in the last few weeks. It has become a lightning rod in the drug price debate and has been scrutinized by lawmakers for pushing up prices of older drugs that it has acquired over the past several years. The company was also served with a subpoena by federal investigators demanding more information about how it prices and distributes its drugs. Price increases for Valeant’s vital heart and diabetes drugs, among others, have grown over 700% in some cases.

Pearson said that Valeant (VRX) will back down from its long-running strategy of buying “mispriced products” and raising prices, instead focusing investment on research and development. About 15% of the company’s U.S. growth last quarter was due to price gains.


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