VRX Valeant's Future Sales Become a New Focus
BY Dow Jones & Company, Inc. — 7:35 PM ET 10/27/2015
By Michael Rapoport And Jonathan D. Rockoff
When Valeant Pharmaceuticals International Inc. (VRX) defended its accounting and business practices to investors Monday, it said a pharmacy business comprised a relatively small portion of Valeant's revenues. If Valeant and the pharmacy broke ties, Valeant's growth may slow, but not "dramatically," Valeant's chief executive said.
Yet, the question of how important the pharmacy, Philidor Rx Services LLC, is to the Canadian drug maker's growth persisted Tuesday, with one ratings firm revising its outlook on Valeant bonds, citing Valeant's growth prospects in light of the controversy around Philidor. Some of the financial data Valeant disclosed Monday suggests its Philidor relationship has been a lucrative one, contributing to Valeant's revenue growth.
Philidor helps patients fill prescriptions for some of Valeant's drugs. Some analysts say Philidor helps patients who are prescribed Valeant drugs to get reimbursements for the medicines, rather than lower-cost alternatives sold by other companies that are preferred by insurers. Valeant purchased an option to buy Philidor in late 2014 and has been consolidating its results with its own since.
When investors learned of Valeant's relationship with Philidor last week, they sent Valeant shares down on concerns about accounting, which Valeant has defended, and questions about whether its work with Philidor would prove a sustainable business avenue.
Philidor on Monday said its "relationship with Valeant has benefited countless patients by ensuring they receive their medication quickly and efficiently," and that it is focused on "providing patients the medications their doctors want them to have."
Valeant has been under pressure to show it can run a business and grow organically rather than just through its signature approach of growth through acquisitions, and specialty pharmacies like Philidor appear to be an instrument for achieving that growth.
One example: Jublia, a toenail-fungus treatment that Valeant has touted as a reflection of its commitment to boosting its business through internal research and development. The treatment saw 44% of its revenue flow through Philidor in the third quarter, according to Valeant's presentation Monday.
Valeant has counted on Jublia for sales growth. Valeant has been advertising heavily for the drug, including running an ad during the Super Bowl that featured a fungus-fighting big toe wearing a football helmet.
Philidor comprises 5.9% of Valeant's revenues so far this year, according to Valeant. That percentage of Valeant's 2015 year-to-date revenues equals $455 million--versus $111 million in net sales that Philidor had for most of 2014.
Valeant's revenues are up 29% through the first nine months of 2015 compared with a year ago, to $7.71 billion from $5.98 billion.
The figures suggest Valeant's revenue growth could suffer if it ultimately decides to cut ties with Philidor--which Valeant has called a possibility--or if its ability to sell through Philidor proves less lucrative thanks to the controversy. Valeant said it would have "contingency plans" if it decides to cut ties.
"We do think this is material to the company's growth," said David A. Kaplan, a Standard & Poor's analyst, who on Tuesday revised his outlook on Valeant's junk-grade corporate credit rating to "negative" from "stable." In an email message, Mr. Kaplan said he has "had concerns for a long time about the sustainability" of Valeant's growth through its own business operations, rather than acquisitions.
In his report, he called Valeant's use of Philidor to reach consumers with pricey drugs "unconventional and very aggressive," and questioned whether insurers would continue to pay for Valeant drugs sold through the pharmacy. We " expect payers to increasingly push back on reimbursement, potentially reducing the viability of this channel."
Valeant's stock dipped about 0.5% on Tuesday after a drubbing over the past week. Valeant's 10-year bonds traded late Tuesday at 84.3 cents on the dollar, down slightly from Monday's late price of 85.5 cents.
On Monday, Valeant said the company created a committee of its directors to review issues surrounding Philidor and the other specialty pharmacies it uses.
Write to Michael Rapoport at Michael.Rapoport@wsj.com and Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com