Another shady business relationship has Wall Street worried about Valeant

Wall Street is beginning to raise questions about a mysterious business distributing drugs for Valeant Pharmaceuticals.

Does that sound familiar?

Analyst David Maris over at Wells Fargo

says the drugmaker has been loath to answer questions about Direct Success, a Florida based company that distributes Valeant’s number two 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 or not the compay 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 the fact that it faces 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, major competition has entered the market. And, as Roddy Boyd of the Southern Investigative Reporting Foundation pointed out earlier this year, it’s not carried by Medicare Part D or the Department of Defence.

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.

Valeant has yet to respond to requests for comment on this issue (we’ll let you know when we hear back). Pershing Square, the hedge fund founded by Valeant’s most vocal and supportive shareholder, has declined to comment on the matter.

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