'The sharks are circling:' 5 insights from the Valeant documents
Following a contentious hearing on Valeant's drug pricing earlier this month, the Senate Special Committee on Aging over the weekend released more than 800 pages of emails, internal presentations, and contracts collected during its investigation.
The documents help shed light on issues ranging from Valeant's PR planning to the relationship between prominent Valeant investor Bill Ackman and former CEO Michael Pearson. And they give further insight into the dramatic fall from grace suffered by Valeant over the past year.
At the April 27 hearing, Pearson admitted to "mistakes" and indicated the company should not have pursued acquisitions which could only be justified by steep price increases down the road. Ackman, now a board member, promised lower prices on certain drugs and now appears to be at the forefront of the sweeping reorganization of Valeant leadership.
Former Perrigo CEO Joseph Papa recently replaced Pearson, and eight of the 14 board members have assumed their posts within the past several months. At the same time, Valeant finally filed a long-overdue annual report, easing the threat of default which had grown after the company missed its March deadline.
But Papa and Valeant still have substantial work to do to rehabilitate the company's image, and address the roughly $30 billion in debt incurred during Valeant's acquisition spree.
1.) "Death Spirals"
Valeant's now-familiar troubles first intensified last fall. Days after the company acknowledged a federal subpoena into its drug pricing strategies, reporters and a short-seller from Citron Research began raising questions of Valeant's relationship with the specialty pharmacy Philidor.
The report from Citron accused Valeant of booking false sales through Philidor and using it as a 'captive pharmacy.' Since then, Valeant has dissolved its relationship with Philidor and disclosed $58 million in sales related to product delivered to Philidor which were improperly recognized in 2014. While small in amount, the shady accounting contributed to doubts over the company's business practices and precipitated further declines in its stock.
Emails released by the Senate Aging Committee reveal the depth of concern felt by Valeant investor (and now board member) Bill Ackman. On October 27, a day after The Wall Street Journal published an article asking whether Valeant was the next Enron, Ackman emailed Pearson offering his help in dealing with the scrutiny.
"I don't think you are handling this correctly and the company is at risk of getting into a death spiral as a result," Ackman said.
Later that morning, he sent a longer email to Pearson and a number of Valeant executives urging the company to hold an immediate, open-ended conference call and truthfully answer all questions without a script.
"You are getting very poor advice from your lawyers and your PR advisors. I am sure they advised you to have a scripted call and limit questions. The only people that need scripts and limited questions are crooks. Joe Nocera [the reporter from The Wall Street Journal] is right. You look like Enron," Ackman said.
"The torpedoes are in the water and the sharks are circling," he continued. "We are on the brink of a catastrophe that will dramatically affect the lives of everyone involved in a negative way."
2.) Cuprimine and Syprine pricing
At the Senate hearing last month, senators focused on aggressive price increases by Valeant on four drugs: Isuprel, Nitropress, Cuprimine, and Sypine. Prices for all four were raised sharply after being acquired by Valeant.
Cuprimine and Syprine both treat a rare condition known as Wilson's disease, which leads to a toxic accumulation of cooper in the body. A patient with the condition, Berna Heyman, had testified earlier in the hearing how her co-pay for Syprine skyrocketed to a projected $10,000+ per year after Valeant acquired the drug. She had been denied financial help under Valeant’s patient assistance program until The Financial Times interviewed her for an article.
Some of the documents released give a stark illustration of the scale of price increases for the drugs (charts assembled by the Senate committee).
A letter from the law firm Covington & Burling LLP sent to the Committee on behalf of Valeant also revealed a wide disparity in the price charged for Cuprimine in the U.S. versus in Canada and Brazil.
While 100 tables cost $26,188.64 in the U.S., the same amount only costs around $270 dollars in Canada, and about $70 in Brazil. In both Canada and Brazil, however, government agencies play a role in setting the drug's price. (The letter did not address Syprine.)
Valeant acquired Cuprimine and Syprine as part of its $318 million acquisition of Aton Pharma in May 2010. In other documents showing Valeant's communications planning, the company emphasized the need to receive a sufficient return on investment on the drugs.
3.) "We are not remotely like Turing in any way shape or form"
In September 2015, Valeant's chief financial officer Robert Rosiello emailed the leadership team with an outline of talking points to address criticism of the company's pricing tactics.
One of the subject headers read "We are not remotely like Turing in any way shape or form." Other talking points addressed the price increases for the heart drugs Nitropress and Isuprel, explaining Valeant's rationale. However, the original outline suggests a scenario where Valeant's acquisition could only work if dramatic price increases were taken immediately.
The draft talking points indicate Valeant needed to quickly raise the price to achieve an adequate return on its $350 million investment as generic competition was imminent.
A PR executive from Sard Verbinnen and Co. sent back an edited version, which changed the reference to Turing: "Valeant is a fully integrated healthcare company and comparisons to companies like Turing Pharmaceuticals are unfounded." The edited version also reshaped the other talking points, eliminating the references to the price Valeant paid for the drug and uncoupling the threat of generic competition with Valeant's pricing rationale.
4.) Hospital discounts for Isuprel and Nitropress
One of the major issues raised at the Senate hearing was the increased burden felt by hospitals after Valeant raised the price of Nitropress and Isuprel. Both of the drugs are commonly used by hospitals during medical procedures.
Documents submitted by Valeant to the committee argued the price increases have had limited impact on the average hospital's costs, and pointed to the company's offer for a volume-based discount.
But senators at the hearing pushed back on these claims, saying hospitals they contacted had received no discount offers from Valeant.
One of the documents confirmed the limited scope of the initial discount offer. As of April 25, Valeant had only entered into contracts for discounts with three hospital groups: MedAssets Performance Management Solutions, Premier Healthcare Alliance, and Kaiser Foundation Hospitals/Kaiser Foundation Health Plan. Valeant has not entered into any contracts with individual hospitals for these discounts.
Despite Valeant's claims its prices increases have little impact on hospitals, the Senate committee collected responses from a number of hospitals and hospital networks indicating a substantially increased burden.
The Cleveland Clinic, which has a network of 11 hospitals, told the committee it spent nearly $5.4 million on the two drugs alone in 2015. In October, the chief pharmacy officer at the Cleveland Clinic reached out to Valeant to discuss a discount. After acknowledging receipt of the request, however, Valeant never followed up and the Cleveland Clinic had not heard back by April 25.
Other hospitals had similar experiences. The Johns Hopkins health system, a five hospital network in the Baltimore, MD area, said it had not received any offer of a discount despite spending nearly $1 million on the two drugs in 2015.
Ascension, a 137-hospital system, claimed Valeant denied its requests for a discount. Health Trust Purchasing group, a group purchasing organization which serves 1,400 acute care facilities, also had no luck getting a discount (as of April 25).
Ackman has said Valeant will now extend the 30% discount to hospitals across the board, but no information is available whether that extension has taken effect.
In correspondence with the Senate Aging Committee, Valeant said much of its growth came from increased volume of drugs prescribed rather than price increases.
A company presentation on third quarter earnings from October 19 claimed unit volume growth and net realized price changes contributed an equal share to Valeant's organic growth in 2015 up to that point. For U.S. branded prescription drugs, a 41% organic growth in 2015 was driven by a 17% increase in prescription volume and a 24% increased in net realized price.
That picture had changed dramatically by late May. In an email, Valeant board member Howard Schiller told Pearson, "Excluding Marathon [the acquisition for Marathon Pharmaceuticals], price represented about 60% of our growth. If you include Marathon, price represents about 80%."
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