From pilot to profit-maker, Valeant's pharmacy rose quickly

Mon Oct 26, 2015 6:50pm EDT
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By Caroline Humer

NEW YORK Oct 26 (Reuters) - The pharmacy at the center of suspicions over Valeant Pharmaceuticals International Inc's business practices began as a small pilot project two years ago and quickly grew to account for 7 percent of the drugmaker's revenue.

Valeant disclosed on Monday details of its relationship with Pennsylvania-based Philidor Rx Services, defending the pharmacy against allegations of illegal activity while pledging to review the business carefully.

Few Valeant investors had heard of Philidor until last week, when influential short-seller Citron Research said it was being used to create "phantom accounts" and inflate the drugmaker's revenue. Valeant immediately denied the allegations, but shares in the company tumbled as investors questioned its pharmacy ties.

"When you ... construct an unusually complex and not transparent way of doing things, the first question is: 'Why didn't you do it the standard easy way?'," said Erik Gordon, a professor at the University of Michigan's law and business schools.

Valeant explained on Monday that the pharmacy began as a pilot under Medicis Pharmaceutical Corp, a maker of anti-wrinkle medicines and facial fillers that Valeant acquired in 2012. By January 2013, Valeant began studying how to build up the program, known at the time as the Medicis Alternate Fulfillment Program.

The pharmacy passed on discounts paid for by Valeant to patients with commercial insurance, often reducing their out-of-pocket costs to zero and helping them to pay for medicines that they could not otherwise afford. When the patient was covered, Valeant would bill insurance companies for reimbursement.

This process effectively denied patients access to cheaper or alternative drugs and circumvented the way health insurers typically pay pharmacies for drugs.

The program grew from distributing two drugs to at least 10 Valeant medications, including steroid cream Locoid and acne treatment Solodyn, Valeant said on Monday. Its biggest success may be distribution of the toenail fungus treatment Jublia, as Philidor now handles 44 percent of the drug's sales.   Continued...