Valeant: O Intelligence Of Comfort Too Joy
As every vacation moving painting watcher knows, it’s your Christmas spirit—the very power of your belief—that gives Santa’s reindeer the get-up-and-go to deliver a sackful of toys. But similar those woebegone characters who openly enquiry the really existence of gift-bearing emissaries from the frozen north, nosotros doubted Valeant’s powerfulness to wring novel sales from former drugs, to conjure organic growth from existing brands facing generic competition. Shareholders had a party, as well as nosotros were grumpily bah-hum-bugging over yesteryear the bar. We didn’t believe.
And so, inwards the midst of this vacation season, nosotros are gathered hither today to denote our triumph over doubt, our victory over misgivings, as well as our encompass of the festive spirit. What ghostly portend of a ghastly Christmas hereafter has restored us to the faithful flock? Well, similar Scrooge before us, showtime nosotros ask a facial expression at Christmas past.
Valeant completed the acquisition of Medicis on eleven Dec 2012, almost iii years agone today. And before Valeant’s warm embrace, sales of Medicis’ acne handling Solodyn had fallen through the ice, so to speak, according to the respective 10-Q filings:
A Marketwatch article told the tale:
[Valeant] stock has fallen dorsum with worry that sales of Medicis's blockbuster drug, Solodyn, may live declining faster than expected.…
Solodyn generates almost 40% of Medicis's annual sales, analysts say. Morgan Stanley & Co. estimates the handling accounts for around 75% of the company's earnings per share. H5N1 Medicis illustration declined comment. Valeant Chief Executive Michael Pearson, inwards an interview, said he agreed with the 40% revenue estimate, but declined comment on the turn a profit projection.
Some analysts are taking number with the drug's growth prospects, with signs of flagging sales. Solodyn prescriptions inwards the U.S. cruel 44% during the terminal calendar week of August from a twelvemonth earlier, according to information from IMS Health, a healthcare information company. In the showtime 2 months of the 3rd quarter, Solodyn prescriptions cruel 24% from the showtime 2 months of the 2d quarter, according to Piper Jaffray & Co., based on IMS data.
On Sept. 14, Morgan Stanley downgraded Valeant to equal weight from overweight, “concerned almost Solodyn's growth outlook.”
But Valeant was unbowed. While its forecast of $250-$275M (p. 10) inwards sales for Solodyn inwards 2013 was far besides high (actual was $200M, p. 5), a fairly sizeable turn down from what nosotros tin regard of 2012), sales appear to receive got stabilized inwards 2014 ($210M, p. 9) as well as fifty-fifty started growing ane time again (LTM: $250M, #7 production worldwide every bit of 3Q15, p. 5).
Forgive the mixed metaphor, but some other vacation tale provides a prissy summary: sales of Solodyn that could barely satisfy Wall Street for some other quarter (give or take) receive got miraculously lasted to a greater extent than than 8 quarters (give or take).
During this time, retail prices of Solodyn receive got climbed from about $700 inwards 2011 to over $1100 for a thirty twenty-four hours supply. On Valeant’s account, they sold to a greater extent than pills at higher (list) prices, despite contest from inexpensive generic alternatives. H5N1 vacation miracle, indeed.
But how? How tin y'all sell to a greater extent than book of an former drug at a higher listing cost spell facing generic competition? In fact, a recent article in JAMA Dermatology made the observation, later checking retail prices of several dermatology drugs over a six-year period, that prices for Valeant's drugs had risen the most.
The ValeantNow PR commandos, quick to the barricades, helpfully pointed out that Valeant sells a lot of dermatology drugs as well as that they didn't ain these for the entire period, but lately. Apparently retail prices ascension of their ain volition, as well as the fact that “these products faced generic competition” makes such increases less notable, non more. (Note to analysts: nosotros regard the chance for more “cost synergies” in the marketing department: at Valeant, prices self-levitate.)
Generous to a fault, Valeant takes pains to remind us that its net prices receive got risen much to a greater extent than modestly. On the 3Q15 conference call, Mike Pearson said (p. 7):
As most of the commentary around cost centers on the wholesale cost or listing price, nosotros wanted to provide a to a greater extent than clear painting on what Valeant genuinely realizes from a cost action, which is considerably dissimilar than what has been portrayed. If y'all facial expression at the top 10 dermatology products, which correspond around 62% of our dermatology portfolio, nosotros took, on average, a 14% gross cost increment on these products this year, nevertheless nosotros realized less than a 2% cost increment on a cyberspace basis.
…
In reality, nosotros increased cost on 85 of our 156 branded pharmaceutical products, or 54% of our products. And our average gross cost increment was 36%. It is of import to annotation that our realized cost increment was 24%.
Furthermore, Valeant’s “patient assistance” (aka “access”) contributions to unnamed foundations grew far faster than its revenue, at a charge per unit of measurement of 128% compounded from 2012 to 2016 (works for Alibaba).
We believe that Philidor was a bigger success than Valeant as well as most investors (ourselves included) could receive got imagined. But now, with Philidor unwound, Valeant right away faces the chore of rebuilding its network of atypical “specialty pharmacies” that dispense its expensive branded products inwards the U.S.
To acquire a feel of how challenging that powerfulness be, nosotros ask to acquire our arms around Philidor’s contribution to Valeant’s results. Just how successful was this undercover fulfilment network? On a scale of ane to “team of 8 flight reindeer,” Philidor was Rudolf. Let’s verbalize numbers.
Valeant maintains that Philidor’s contribution to pulling the sleigh has been modest, at best. On the Oct. 26, 2015, call they said:
- In Q3 2015, Philidor represented 6.8% of total Valeant revenue (p. 10)
- Philidor accounts for 5.9% of Valeant cyberspace revenue YTD (p. 11)
- At the fourth dimension of the Purchase Option Agreement inwards December, 2014, Philidor YTD net sales were $111 million (p. 53)
Philidor grew from almost nil to almost 7% of sales over iii quarters. If nosotros weight the 1Q as well as 2Q figure of $265.4M yesteryear Valeant’s US revenue inwards 1Q15 as well as 2Q15, nosotros tin approximate that Philidor has been growing at an average of 28.5% quarter over quarter inwards 2015. (As far every bit nosotros know, Philidor only operated inwards the United States.) Had Philidor’s conspiratorial nattering nabobs of negativism, and—who else?—Congress, the miracle on Horsham Road has officially declared its receipt of a lump of coal. Valeant, meanwhile, is working really difficult to “put inwards house a novel specialty programme to complement the retail scripts” (p. 7) to supersede Philidor.
One problem, of course, is that PBMs as well as payers are wising upwards to what’s been going on. And they receive got ways to deal dorsum against the rising tide of “specialty pharmacies.” H5N1 chemist's shop that dispenses almost solely branded dermatology drugs from ane society tends to stick out, we’d imagine.
Also, if it took the magic of Philidor to create drugs similar Solodyn grow “organically,” how “durable” are those products really? Some receive got argued that growth inwards IMS-reported prescription numbers later Philidor’s disclosure inwards belatedly Oct shows that Valeant didn't genuinely ask them anyway. (They come upwards non to praise Philidor, but to bury it.) Why, then, did Philidor be at all? How was it a “competitive advantage?” Why did a chop-chop growing portion of Valeant’s revenue give through its fingers? Valeant says that drugs sold yesteryear Philidor were less profitable. So who needs the hassle as well as the secrecy? The indicate is non that there’s no demand for Valeant’s drugs, only that Philidor makes such demand appear artificially robust, inwards our estimation. If nary a prescription testament live lost without Philidor, for certain Valeant wouldn’t receive got sought to expand it or, later its hasty burial, to resurrect it.
Also, if it took the magic of Philidor to create drugs similar Solodyn grow “organically,” how “durable” are those products really? Some receive got argued that growth inwards IMS-reported prescription numbers later Philidor’s disclosure inwards belatedly Oct shows that Valeant didn't genuinely ask them anyway. (They come upwards non to praise Philidor, but to bury it.) Why, then, did Philidor be at all? How was it a “competitive advantage?” Why did a chop-chop growing portion of Valeant’s revenue give through its fingers? Valeant says that drugs sold yesteryear Philidor were less profitable. So who needs the hassle as well as the secrecy? The indicate is non that there’s no demand for Valeant’s drugs, only that Philidor makes such demand appear artificially robust, inwards our estimation. If nary a prescription testament live lost without Philidor, for certain Valeant wouldn’t receive got sought to expand it or, later its hasty burial, to resurrect it.
On that note, nosotros interruption hither for a brief vacation message.
Dear “specialty pharmacy” workshops that Valeant is feverishly rebuilding atop the ruins of Philidor. We wishing to inform y'all that Santa may live watching y'all via a articulation steering committee, may have superhero supernumeraries stationed on your premises, may receive got a zero-strike choice to buy you, as well as may fifty-fifty live consolidating your naughty-and-niceness onto his large ledger. But should a present-delivering mishap occur, y'all elves are on your own, ’cause Santa is legally indemnified. Pay attention, Direct Success Pharmacy of New Jersey.
Enough almost them. What almost the people most inwards ask of our thoughts as well as prayers during the vacation season, the large institutional shareholders? Reuters reports that “Investors said Wall Street wanted iii things from Wednesday's meeting: a 2016 forecast for earnings around $14 per portion versus the $11 projected for 2015, no to a greater extent than bad intelligence or surprises, as well as a novel innovation for selling dermatology products through specialty pharmacies.” We confess that nosotros don’t quite empathize why a hope of “no to a greater extent than bad news” would live to a greater extent than convincing today than it was on say, Oct 19, the engagement of the 3rd quarter telephone vociferation upwards on which Philidor's existence was showtime disclosed. Maybe we’re getting besides former for Santa.
Anyway, for those who believe, inwards whose heads trip the lite fantastic toe visions of sugarplums, 20% IRRs, six-year cash paybacks, as well as up-and-to-the-right cost charts, what testament they detect inwards their stock(ings)? Like all well-behaved children—mindful of their manners when Santa is watching—what investors desire most is a render to the happy golden days of yore. For ane time nosotros are former plenty to larn the truth almost Santa, receiving presents is never the same.
Postscript
Overflowing with the vacation spirit, I’ll relieve the cheery folks at ValeantNow a few minutes.
Here are a few responses they powerfulness consider, as well as why I believe they are wrong.
1) Philidor wasn’t acquired until Dec 2014, so it wouldn’t live business office of “same store sales” or “organic growth.”
This is a distinction without a difference. First, Valeant has stated that Philidor was an ordinary, arms-length client before Dec 2014. Sales of drugs to Philidor—like whatever pharmacy—were therefore included inwards Valeant’s 2014 revenue. Comparing 2015 to 2014 is perfectly fair, every bit the drugs sold to or through Philidor were counted inwards Valeant’s revenue inwards both years (and every bit far dorsum every bit 2013, when it started). When Valeant consolidated Philidor is irrelevant.
Second, if nosotros excluded Philidor’s revenue from same-store sales inwards 2015, as well as so the stated numbers wouldn’t match. Total US sales inwards 3Q15 were $1,968.2M, spell “same store sales” were $1,315.4M, a deviation of $652.8M. The deviation should roughly check 3Q sales of products acquired inwards 2015. To wit: GI as well as Urology/Oncology, acquired this twelvemonth from Salix as well as Dendreon, generated $462.8M as well as $69.3M inwards 3Q15, spell Isuprel as well as Nitropress added $50M as well as $35M, respectively. Those 4 together total $617.1M. If nosotros are to add together Philidor’s $189.5M to this $617.1M, as well as so the reported same store sales figure is overstated. (Even ignoring Isuprel as well as Nitropress, the deviation would live besides large.) Point being: Valeant counted Philidor’s numbers inwards organic growth, as well as so practise we.
(Note that the total U.S. Sales numbers inwards Table 3 as well as Table 6 of the 3Q press release don’t match, at $1,968.2M vs. $1,947.8M, respectively, and the deviation is to a greater extent than than the footnote to Table 6 explains. We’ve used the figure from Table 3, every bit it’s the largest such deviation as well as therefore would live most reverse to our explanation.)
2) “Philidor didn’t only dispense Valeant products.” Ok, but every bit y'all receive got told us, the deviation is almost $1M a quarter (p. 8). We’d live happy to receive got a detailed breakdown of the cost as well as book of each drug Philidor dispensed (see #3 below), so delight experience costless to provide one.
3) “Philidor dispensed to a greater extent than than but branded products.” Sure. Please provide a listing of the Valeant products Philidor dispensed, with a count of prescriptions filled as well as average total prices paid, grouped yesteryear drug as well as yesteryear co-pay amount.
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