Wall Street is beginning to raise questions about a mysterious business distributing drugs for Valeant Pharmaceuticals.
Does that sound familiar?
David Maris, an analyst at Wells Fargo, says the drugmaker has been loath to answer questions about Direct Success, a Florida-based company that distributes Valeant’s No. 2 product, depression treatment Wellbutrin XL.
In fact, when asked about it in September, CEO Joe Papa said he didn’t know what it was.
This is not especially encouraging. Recall that Valeant’s stock has fallen around 90% in the past year, since we learned of a secret pharmacy that exclusively sold Valeant drugs. The existence of this business – called Philidor – raised questions about the company’s business practices and sparked a number of ongoing state and federal investigations. Authorities are looking into whether the company committed insurance fraud while pushing high-cost Valeant drugs, among other issues.
The price disconnection
What makes Wellbutrin XL such a conundrum is its high price despite facing generic competition.
“Valeant has raised the WAC” – wholesale acquisition cost – “price of Wellbutrin XL 300mg from $14.41 per pill in January 2014 to $47.59 in July 2015 (generics cost $1.50 or less per pill),” according to Wells Fargo.
It’s strange that the price can be maintained at that level. The drug went off patent in 2006, and major competition has entered the market. And, as Roddy Boyd of the Southern Investigative Reporting Foundation noted earlier this year, it’s not carried by Medicare Part D or the Department of Defense.
So who is paying for this stuff? And how is it getting to them?
From Wells Fargo (emphasis ours):
“On its website, Direct Success says part of its expertise is ‘to help maintain presence and availability of their medications for drugs that are subject to substitution at the retail level.’ Based on our review and interviews, we believe that Direct Success’s owners also operate one or more pharmacies affiliated with Direct Success.
“We identified a Florida-based storefront pharmacy that is a local hometown pharmacy, but appears to us to be owned by Direct Success and distributes Wellbutrin XL. We believe that there may be a significant risk to Wellbutrin XL sales if PBM scrutiny tightens around Wellbutrin XL. We are lowering our Wellbutrin XL estimates to show a greater decline.”
That part in bold is sending shivers up the spines of Valeant investors. Part of the issue with Philidor is that it used its ownership in smaller, local pharmacies to get insurers to pay for drugs. Valeant has said that Direct Success only makes up 5% of Wellbutrin XL sales, but that doesn’t necessarily go for pharmacies owned by Direct Success.
The company’s shares have fallen by 21% in just the past month.
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Valeant, for its part, says the following:
“DSI is a specialty pharmacy which Valeant partnered with in 2013 in connection with fulfillment of the Wellbutrin XL Guarantee Program. Valeant has no direct or indirect ownership, rights to ownership, or employee relationships with DSI.
“The volume of total Wellbutrin XL within this program amounted to approximately 5% of 2015 brand revenues for Wellbutrin XL. Valeant ceased the marketing relationship with this distributor and stopped seeking to enroll new patients in the program in mid-2016 as we began directing new and existing patients into our larger, consolidated partnerships. We are working to ensure effective continuation of care and intend to continue co-pay support for patients in this program as we move forward with this transition.”
Pershing Square, the hedge fund founded by Bill Ackman, Valeant’s most vocal and supportive shareholder, has declined to comment on the matter.