December 23, 2015 / 9:54 PM / 2 years ago

Valeant's Walgreens deal solves some problems but growth issue persists

5 Min Read

NEW YORK, Dec 23 (Reuters) - The recent pact between Valeant Pharmaceuticals International and Walgreens Boots Alliance may salvage the drugmaker's relationships with physicians, but is unlikely to fully restore Valeant's previous revenue growth from high-priced, branded drugs, according to doctors and investors.

Under the deal announced last week, Walgreen's will take over many of the functions that had previously been managed by Philidor Rx Services, the specialty pharmacy with which Valeant cut ties in response to allegations of aggressive billing practices.

Walgreens will administer discount programs that allow patients to obtain high-priced Valeant drugs at little to no cost. It will also handle the drugs' distribution and obtain reimbursements for Valeant from insurance companies.

The agreement will address a difficulty that has loomed large since Valeant severed its relationship with Philidor in November: the ability of patients to easily obtain Valeant drugs at an affordable price.

However, it will do little to mitigate Valeant's longer term challenge of persuading increasingly cost-conscious insurance companies to cover the cost of its expensive, branded products.

At stake is the future revenue growth of Valeant's dermatology portfolio, one of the company's largest units and the most reliant on pricey medications. Some of its most popular products include toe fungus cream Jublia, acne medication Solodyn and eczema treatment Elidel.

Representatives of Valeant declined to comment.

Valeant disclosed its close ties to Philidor this fall, amid reports about controversial reimbursement practices aimed at boosting Valeant's revenue. Valeant has denied knowledge of misdeeds; its board is conducting an investigation.

By cutting off Philidor, Valeant lost the primary administrator of its discount program for co-pays borne by individuals under their health insurance plans. Those discounts made even Valeant's most expensive products competitive with generics by eliminating patients' out-of-pocket costs - costs so high that many individuals could not otherwise afford the Valeant drugs.

Since then, doctors interviewed by Reuters said they have been forced to prescribe an increasing number of cheaper generics drugs, even though they think the Valeant products are better. Valeant said prescriptions dropped 20 percent in the fourth quarter.

However, doctors are optimistic the Walgreens deal will enable them to start writing prescriptions for Valeant drugs again.

"It (will) help to have at least one pharmacy we could count on," said Doris Day, a dermatologist based in New York City who is affiliated with Lenox Hill Hospital.

Although the Walgreen's pact will help sustain the flow of new prescriptions for Valeant drugs, it will do little to help Valeant face off with increasingly cost-conscious pharmaceutical benefits managers, said one investor, who asked to remain anonymous.

Pharmaceutical benefits managers, which administer prescription drug plans for insurers, are countering high drug prices by excluding some medications from coverage or requiring that patients try cheaper alternatives first.

That could force Valeant to either accept lower prices from the benefit managers or face mounting difficulty collecting reimbursements, said Brian Tanquilut, a healthcare services research analyst at Jefferies.

He expects pricing pressure on specialty pharmaceutical companies to steadily increase in the coming years.

"This is going to be a big issue going forward for some specialty pharmacies and will drive pricing compression," Tanquilut said.

CVS Caremark already excludes 90 percent of Valeant's drugs from coverage and has made no changes to its policy since the Walgreen's deal, CVS Health's chief executive, Larry Merlo, told investors last week.

Express Scripts also said its coverage decisions "remain in place."

Since the deal with Walgreen's, Valeant has cut prices on dermatology drugs, in some cases by as much as 50 percent.

Overall, the Walgreens arrangement should help Valeant recover about half of the revenue it lost by abandoning Philidor, bumping sales forecasts by 4 percent annually, Jefferies equity research team predicted in a note. Philidor had accounted for 7 percent of Valeant's sales.

Valeant sees 2016 revenue climbing an estimated 21 percent to $12.5 billion to $12.7 billion, down from 43 percent revenue growth in 2014 and 60 percent in 2013. (Reporting by Carl O'Donnell and Caroline Humer; Editing by Michele Gershberg, Eric Effron and Leslie Adler)

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