By Deena Beasley
LOS ANGELES (Reuters) - Investor concerns over accounting practices at Valeant Pharmaceuticals (N:VRX) International Inc (TO:VRX) have put a spotlight on the little-known and fast-growing specialty pharmacy industry.
Shares of Valeant fell 19 percent on Wednesday after influential short-seller Citron Research accused the company of using specialty pharmacies, through a network led by its partner Philidor Rx Services, to inflate its revenue, an allegation the drugmaker denied. Specialty pharmacies are designed to deliver medications with unique handling, storage and distribution requirements, often for patients with complex conditions such as cancer, multiple sclerosis or rheumatoid arthritis. They can provide more detailed guidance for patients on how to take the drugs. Specialty drugs are often expensive, sometimes priced at over $100,000 a year.
The industry has been growing quickly as drugmakers shift research and sales efforts to more complex medications. Pembroke Consulting estimated early this year that the number of accredited specialty pharmacies would jump by nearly 100 to a total of 250 in 2015.
In the past, drugmakers were directly involved in distribution of their products. Merck & Co (N:MRK), for example, owned a pharmacy service company known as Medco. But it spun off that business in 2003, partly due to concerns over potential conflicts of interest.
Medco was later acquired by Express Scripts Holding Co (O:ESRX), which is now the largest U.S. pharmacy benefits manager.
A New York Times report earlier this week said that Valeant worked with Philidor Rx Services, based in Hatboro, Pennsylvania, to increase sales, and prices, for treatments that don't meet the specialty criterion, including drugs for acne and toenail fungus, and that regular pharmacies may not prescribe.
The same day, Valeant disclosed that a growing percentage of its revenue is coming from products dispensed through specialty pharmacies, and that it had purchased an option to acquire Philidor. Valeant is Philidor's main customer.
"We find specialty pharmacies improve patients' access to medicines at an affordable price, and help ensure physicians are able to prescribe the medications they believe most appropriate for their patients," Valeant Chief Executive Michael Pearson (L:PSON) told investors on a conference call.
He said that for many of the company's skin products, Philidor and other specialty pharmacies fill a customer's prescription before reimbursement is worked out with an insurer, and that Valeant only recognizes revenue from the products once the drug reaches a patient.
Pearson also described how Valeant's relationship with another specialty pharmacy, R&O Pharmacy LLC of Camarillo, California, turned sour. Valeant said it had shipped $69 million worth of medications at wholesale prices to R&O, and that the pharmacy "is currently improperly holding significant amounts it receives" from insurers.
R&O has sued Valeant in California over its efforts to claim the money, saying it has no contractual relationship with the drugmaker. Representatives of R&O declined to comment.
Citron alleged that R&O and Philidor may actually be the same company, and that the two were used by Valeant to create phantom accounts to inflate revenue. In a statement, Philidor said R&O is part of its network of affiliated pharmacies and that it provides services to those partners including call center functions, help with insurance claims, technical support and "certain management services."
"Philidor does not currently have a direct equity ownership in R&O Pharmacy or the affiliated pharmacies, but does have a contractual right to acquire the pharmacies now or in the future subject to regulatory approval," the statement said.
Scott Knoer, chief pharmacy officer at the Cleveland Clinic, said the web of relationships raises concern. Cleveland Clinic and other hospitals have been hit financially by Valeant price increases on heart drugs Isuprel and Nitropress.
"There would be an inherent conflict of interest if a specialty pharmacy is owned by someone making the drug," Knoer said. "There could be pressure on the pharmacy to start patients on the drug, or continue patients on it, or not stop them" as warranted. While concerns over Valeant's ties to its specialty pharmacies hit rival stocks on Wednesday, both Allergan Plc (N:AGN) and Endo International Plc (O:ENDP) were quick to say their businesses did not operate in the same manner.
Allergan said about 3 percent of its U.S. sales of branded drugs are distributed through specialty pharmacies, most of which are specialty products that require careful handling. Endo said it uses specialty pharmacies mainly for branded products that need to be administered by doctors, and that drugs distributed through this channel represent about 3 percent of the company's projected total revenue for 2015. It said any specialty pharmacies that it works with are fully independent of the company.