Around 7:10 p.m. ET on Wednesday, Philidor – a specialty-pharmacy company that distributes and bills clients for embattled drug company Valeant Pharmaceuticals – made a statement that helped address some of the questions raised by short-selling firm Citron.
One of the questions addressed, in its simplest form, is how three companies – Valeant, Philidor, and R&O – are related.
We know that Valeant is Philidor’s only client and has the option to buy the company.
And after the late release we know that Philidor also has the option to buy R&O.
“Philidor has contractual relationships with the affiliated pharmacies, such as R&O Pharmacy, under which we provide those services,” said the release.
“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 circle matters
In a report Wednesday, Citron said that Valeant – Philidor’s only client – was invoicing Philidor’s affiliate, R&O, for drugs R&O never sold or received.
That’s because R&O filed a court document saying that it had no idea why Valeant had invoiced it for $69 million worth of product it had never received or sold.
Citron’s report also highlighted the connection between Philidor and R&O, pointing out that they shared boards and infrastructure.
The leap Citron then made in its report is that R&O and Philidor are the same company, meaning Valeant owns both, which means the company is billing and paying itself.
Philidor said late night Wednesday that it isn’t the same company as R&O Pharmacy, but it does have option to buy it. R&O operates as part of Philidor’s “network” but operates in much the same capacity.
It also mentioned “affiliated pharmacies,” which means we may be hearing about more specialty pharmacies as this story unfolds.
Specialty pharmacies are used by big drug companies to act as distribution channels and bill their products, often bypassing insurance companies whose partial mandate is to ensure that patients purchase the drugs that will do the job at the lowest cost.
Specialty pharmacies do this by expediting the drug purchasing process for patients and doctors. Instead of going through insurers, patients call specialty pharmacies directly. Then the specialty pharmacies try to recover from the insurers.If they take a loss, they and the drug companies they serve recover from that in volume.
- Reuters/ Brendan McDermid
The drug companies, for their part, say they do not book revenue from specialty pharmacies until a sale is made to the patient.
It all evens out, as long as the price is right.
So it’s not hard to see the benefit of a drug company having a relationship with one of these pharmacies. It’s a new, but not unheard of, way for big drug companies to make money.
You can also see how beneficial it would be for a drug company to own one of these distribution channels outright.
An industry wide problem
After the report was released Valeant’s stock cratered, ending the trading day down 19% even after the company’s third largest shareholder, billionaire investor Bill Ackman, threw $200 million on top of his stake.
In fact, the entire drug industry suffered during Wednesday’s trading session, and drug companies like Allergan – once a Valeant acquisition target – and Endo, both released statements saying that they didn’t use specialty pharmacies.
Suddenly no one wants to touch that space.