Specialty pharmacies in spotlight as Valeant ties questioned

By Deena Beasley
LOS ANGELES, Oct 21 (Reuters) - Investor concerns over
accounting practices at Valeant Pharmaceuticals (N:VRX) International
Inc VRX.TO have put a spotlight on the little-known and
fast-growing specialty pharmacy industry.
Shares of Valeant fell 19 percent on Wednesday after
influential short-seller Citron Research accused the company of
using specialty pharmacies, through a network led by its partner
Philidor Rx Services, to inflate its revenue, an allegation the
drugmaker denied. urn:newsml:reuters.com:*:nL1N12L1OH
Specialty pharmacies are designed to deliver medications
with unique handling, storage and distribution requirements,
often for patients with complex conditions such as cancer,
multiple sclerosis or rheumatoid arthritis. They can provide
more detailed guidance for patients on how to take the drugs.
Specialty drugs are often expensive, sometimes priced at over
$100,000 a year.
The industry has been growing quickly as drugmakers shift
research and sales efforts to more complex medications. Pembroke
Consulting estimated early this year that the number of
accredited specialty pharmacies would jump by nearly 100 to a
total of 250 in 2015.
In the past, drugmakers were directly involved in
distribution of their products. Merck (N:MRK) & Co MRK.N , for example,
owned a pharmacy service company known as Medco. But it spun off
that business in 2003, partly due to concerns over potential
conflicts of interest.
Medco was later acquired by Express Scripts Holding Co
ESRX.O , which is now the largest U.S. pharmacy benefits
manager.
A New York Times report earlier this week said that Valeant
worked with Philidor Rx Services, based in Hatboro,
Pennsylvania, to increase sales, and prices, for treatments that
don't meet the specialty criterion, including drugs for acne and
toenail fungus, and that regular pharmacies may not prescribe.
The same day, Valeant disclosed that a growing percentage of
its revenue is coming from products dispensed through specialty
pharmacies, and that it had purchased an option to acquire
Philidor. Valeant is Philidor's main customer.
"We find specialty pharmacies improve patients' access to
medicines at an affordable price, and help ensure physicians are
able to prescribe the medications they believe most appropriate
for their patients," Valeant Chief Executive Michael Pearson (L:PSON)
told investors on a conference call.
He said that for many of the company's skin products,
Philidor and other specialty pharmacies fill a customer's
prescription before reimbursement is worked out with an insurer,
and that Valeant only recognizes revenue from the products once
the drug reaches a patient.
Pearson also described how Valeant's relationship with
another specialty pharmacy, R&O Pharmacy LLC of Camarillo,
California, turned sour. Valeant said it had shipped $69 million
worth of medications at wholesale prices to R&O, and that the
pharmacy "is currently improperly holding significant amounts it
receives" from insurers.
R&O has sued Valeant in California over its efforts to claim
the money, saying it has no contractual relationship with the
drugmaker. Representatives of R&O declined to comment.
Citron alleged that R&O and Philidor may actually be the
same company, and that the two were used by Valeant to create
phantom accounts to inflate revenue. In a statement, Philidor
said R&O is part of its network of affiliated pharmacies and
that it provides services to those partners including call
center functions, help with insurance claims, technical support
and "certain management services."
"Philidor does not currently have a direct equity ownership
in R&O Pharmacy or the affiliated pharmacies, but does have a
contractual right to acquire the pharmacies now or in the future
subject to regulatory approval," the statement said.
Scott Knoer, chief pharmacy officer at the Cleveland Clinic,
said the web of relationships raises concern. Cleveland Clinic
and other hospitals have been hit financially by Valeant price
increases on heart drugs Isuprel and Nitropress.
"There would be an inherent conflict of interest if a
specialty pharmacy is owned by someone making the drug," Knoer
said. "There could be pressure on the pharmacy to start patients
on the drug, or continue patients on it, or not stop them" as
warranted.
While concerns over Valeant's ties to its specialty
pharmacies hit rival stocks on Wednesday, both Allergan (N:AGN_pa) Plc
AGN.N and Endo International Plc ENDP.O were quick to say
their businesses did not operate in the same manner.
Allergan said about 3 percent of its U.S. sales of branded
drugs are distributed through specialty pharmacies, most of
which are specialty products that require careful handling.
Endo said it uses specialty pharmacies mainly for branded
products that need to be administered by doctors, and that drugs
distributed through this channel represent about 3 percent of
the company's projected total revenue for 2015. It said any
specialty pharmacies that it works with are fully independent of
the company.