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

By Carl O'Donnell and Caroline Humer
NEW YORK, Dec 23 (Reuters) - The recent pact between Valeant
Pharmaceuticals International VRX.TO and Walgreens Boots
Alliance WBA.O 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 (N:CVS)'s CVS.N 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.