You might think that after enduring months of government scrutiny and becoming the subject of multiple state and federal investigations, Valeant Pharmaceuticals would not immediately return to the same behaviour that sent its stock price careening down 90% since last October.
In that case, you are wrong.
Valeant CEO Joe Papa told attendees of Wells Fargo’s healthcare conference earlier this month that the company would start raising prices toward the end of the year.
Since it’s already September, Wells Fargo analyst David Maris thinks those increases may have already started.
…on 9/16, Valeant increased the list price of three products: Atropine Sulfate Ophthalmic Ointment, PrednisoLONE Sodium Phosphate Ophthalmic Solution, and Neomycin-Polymyxin-Gramicidin Ophthalmic Solutions — each by 9.9%, according to data from Medi-Span CDI.
In doing this, Valeant is taking a big risk. Namely, it’s just begging the government to continue examining its practices, which can only result in more skittishness from investors.
So why even take the risk? According to Maris the drugs in question only came up to $1.2 million in sales in the Q2 of this year — that’s out of Valeant’s $2.4 billion in sales that quarter.
We asked Valeant why the company is willing draw more fire from authorities this way, but the company has yet to respond to our question.
Back in April, Valeant executives went to Congress and promised that they would lower prices around 10% across the board. They also said that they would lower the price of two heart medications, Nitropress and Isuprel, around 30% (that’s after raising the prices of the drugs 525% and 212%, respectively).
According to Papa at this same Wells Fargo conference, he has not lowered the prices of Valeant’s drugs. And he also said that discounts to Nitropress and Isuprel were only somewhere in the teens.
That’s better than what hospitals had to say about Nitropress and Isuprel. Bloomberg reported last week that most hospitals they asked said they weren’t getting any discounts on the drugs.
“‘Despite their promises to Congress, we’ve seen no reduction in cost nor any improvement in communication,’ said Scott Knoer, chief pharmacy officer at the Cleveland Clinic. Knoer said his organisation contacted Valeant repeatedly about a discount and didn’t have their calls returned.”
Valeant responded with a statement explaining the rebate program it has put in place for the heart drugs for hospitals that ask for it. It’s pretty complicated stuff, but Valeant said it’s “working diligently to finalise” the program for hospital group purchasing organisations that stil aren’t connected.
But again, of the 23 the entities Bloomberg contacted, only one said it was getting the discounts it negotiated with Valeant. Eleven said they weren’t getting discounts on one or both of the drugs. The rest didn’t respond.
About those rebates
And here’s the thing. Right now the pharmaceutical industry is having a come-to-Jesus moment about rebates as a system for paying for drugs.
This soul searching started in earnest earlier this month after public outcry over the price of lifesaving drug, EpiPen. A package of two EpiPens cost $100 in 2007 but is now about $600 — an increase of around 500%. After getting pummelled in the press, the company said it would ramp up patient assistance programs and its coupon system for patients in need.
But Rep. Elijah Cummings (D-Maryland) called all that a “PR stunt.” Politicians are starting to realise that these assistance programs, coupons and rebates are just a way to preserve or disguise high prices.
They’re also a way for middle men to take a cut of drug prices, according to frustrated drugmakers. These middle men are called PBMs. In exchange for their cut, they ensure that a company’s drug is widely distributed.
From a recent Wells Fargo report:
Pfizer’s CEO and others also hit on another important theme that emerged from our discussions regarded rebating. Many companies expressed how, in their view, rebates have evolved from being a tool for paying moderate margins to pharmacy benefit managers (PBMs) for their service to now being a way of purchasing access. This places a greater amount of control with PBMs and payers, while removing some of the decision making from physicians and patients. Many companies appear to agree that it would be helpful to the industry and better for patients if rebating was eliminated. While rebates have played only a minor role in the pricing debate so far, we believe they are bound to become a larger and important component of the discussion going forward.
Heather Bresch, the CEO of the company that makes Epi-Pen, Mylan, complained about this issue as well. It will likely be a topic of discussion on Wednesday as she faces Congress in a hearing about her price increases.
If the government really does start looking into rebates, this could be another risk to Valeant, putting it once again in the government’s crosshairs.
So again, why would Valeant take any of these risks? Maybe because it doesn’t really have a choice if it wants to make guidance (and man, it definitely does).
Once more, Wells Fargo:
We suspect that 2H16 EPS guidance is challenging for Valeant to make, as evidenced by Valeant’s inability at our recent conference to strongly confirm its guidance. Valeant’s 2H16 guidance implies approximately 155% incremental growth in adjusted EPS from 1H16, and, in part, relies on lower SG&A and R&D spending to support making its numbers. As we have previously stated, we do not believe this is a sustainable strategy, as cutting expenses does not increase prescriptions, and with weakness in prescriptions, Valeant is left with its previous strategy of price increases.
It’s not a good look to be left with right now.
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