Bloomberg Hits Valeant With Ill-Informed Article

| About: Valeant Pharmaceuticals (VRX)
This article is now exclusive for PRO subscribers.

Summary

Last Friday, Bloomberg hit Valeant with a story about Wellbutrin which surprisingly continues to grow sales despite generic competition.

The article ignored a few very important details about Wellbutrin, namely that some of its generic copies have been proven to be dangerous.

This unfortunate unawareness led the authors on the wrong track and caused them to suggest answers which are totally off the mark.

Bupropion or bupropion hydrochloride is primarily used as an antidepressant and smoking cessation aid. It is marketed as Wellbutrin by Valeant (NYSE:VRX) and is one of the most frequently prescribed antidepressants in the United States. The drug lost patent protection long ago and several generics are available in the U.S.

In an article titled "How Valeant Tripled Prices, Doubled Sales of Flatlining Drug" Bloomberg hits Valeant again with the question whether the company will be able to grow in the future, as the article's authors believe the past strategies won't work anymore. Here is how these past strategies are explained in the Bloomberg piece:

Wellbutrin XL was transformed into a top seller in part via a relationship with a specialty pharmacy - an arrangement similar in some ways to the one that plunged Valeant into crisis when it first came to light last year. While the relationship may account for only a portion of Wellbutrin XL sales, it nonetheless sheds light on how Valeant has landed at the center of a drug-marketing flap by often picking up the cost of co-pays for consumers and then steadily increasing the prices to insurers.

Even as the number of prescriptions filled for the drug have declined, dollar sales of Wellbutrin XL, Valeant's third-best seller in the third quarter, have kept climbing as Valeant raised the price 11 times over the past two years. Wellbutrin XL, a once-daily version of a 30-year-old antidepressant, costs $1,400 a month, compared with a $30 generic version. Sales were on track to exceed $300 million in 2015, as of the third quarter, up from around $150 million in 2013.

Now, if a large chunk of Valeant's revenues really depended on such sales strategies, it would be worrisome indeed. Fortunately, this is not the case, as Valeant's average net realized price per script has actually decreased over the past year, while script volume grew strongly:

(Source: Valeant Q3/15 presentation)

On the other hand, it is obviously true that gross prices for Wellbutrin have been increased. However, this is just industry practice, whenever a drug nears patent expiry:

(Source)

Even after patent expiration, brand name drug prices continue to increase in many cases. Here is an example: Right before Novartis' (NYSE:NVS) popular hypertension drug Diovan faced patent expiration in 2012, it cost ~$175. Today, the price tag is ~$230 (cash price according to GoodRx). However, just like Valeant does with Wellbutrin, Novartis offers a patient assistance program:

(Source)

Hence, patients manage to get the drug for just $4 and insurance covers the rest. If insurance does not cover the whole rest, the co-pay assistance program will pay up to $75. Most importantly, the co-pay card advises the pharmacist to submit the claim to the primary third party payer first, i.e. the first attempt is to get total reimbursement from insurance. In an ideal case, this means that patients get the drug for just $4 and Novartis receives ~$216 from insurance, thus bypassing generic competition. In fact, the co-pay card explicitly asks patients:

Remember to tell [the pharmacist] that you would like to remain on your branded medication and to note it in their system for future refills.

In many cases this means that instead of paying the lower cost of generic Diovan, insurers end up reimbursing far more than that - and not only once but even for all future refills.

Yet this is perfectly legal industry practice.

Valeant's co-pay program for Wellbutrin works slightly differently (at least the one under Bloomberg's examination, as the article's authors totally ignore that there is a second program as well):

- For patients whose commercial prescription plan reimburses less than $100, patient will be responsible for paying $50 for 30 pills. For patients whose commercial prescription plan reimburses $100 or more, patients will pay $0 for a supply of 30 pills.

- For patients insured with a Medicare prescription plan or insured with Medicare without prescription coverage and the co-pay/co-insurance is more than $50, prescriptions will be processed as cash-paying patients with a $50 co-pay amount and no claim will be submitted to their Medicare plans.

However, the result is similar: As many patients have commercial insurance that covers more than $100, Valeant ends up earning a decent profit despite the availability of cheaper generic Wellbutrin. While in many cases the drug is given away for as little as $50, in some cases Valeant receives far higher reimbursement. Thus, commercially insured patients effectively subsidize uninsured and government insured ones by raising Valeant's average realized price. Seems a strange way to achieve sales, yet this is just how the U.S. system works.

Interestingly, it also works this way for many generic drugs. Take a look at the GoodRx page for generic Wellbutrin. You will notice huge price differences even for the generic versions, depending on the dispensing pharmacies and whether you pay cash or have a coupon. In several cases, the cash pay option for generic Wellbutrin is actually higher than the $50 cash pay option offered by Valeant. (If you want to understand how this is possible, read my article on pricing problems in the generic drug segment. The article also puts into the right context some of Mark Merrit's critical statements quoted in the Bloomberg article.)

Finally, let's talk about the most important question posed by the article: Now that Valeant has attracted so much scrutiny, will insurers start refusing to pay a premium for drugs like Wellbutrin XL? - I doubt it and here's why:

1) Valeant has just approximately 1.5% of the total Wellbutrin XL bupropion market, a share that has declined significantly over the past few years, with 98.5% going generic. As we have seen in many cases, cash pay prices for generics are higher than Valeant's subsidized cash pay option.

2) There will always be some patients that prefer branded drugs and in the case of Wellbutrin, they have excellent reasons to do so. In fact, there have been generic copies of Wellbutrin (like Budeprion) that were not equivalent to the original drug. (Full story here.) This caused many patients to experience extreme and dangerous side effects, as can be read here. A few examples:

"I have been taking Budeprion XL 300 mg for 3 months instead of Wellbutrin XL 300 mg. I find that I am easily upset and cry very easily. Sometimes I feel aggressive. I also have short stabbing pains in my head."

"Several months ago I switched over to generic Wellbutrin. Within two weeks I experienced the worst case of depression that I can remember. I had the most severe suicidal thoughts ever."

"Budeprion almost killed me (by having me want to kill myself) in 2007. I had every side effect imaginable (lightning headaches, instability, suicidal thoughts, homicidal thoughts, inability to keep control, lack of sleep, lack of libido, etc)."

Keeping in mind that we are talking about patients with psychological problems, I believe these patients will likely forever prefer the brand name drug and never try again generic Wellbutrin. Moreover, if patients don't trust their medication, adherence will likely be poor which especially in the case of depressed patients can lead to dangerous outcomes. All this obviously gives Valeant some pricing power. Wellbutrin is the only trusted brand out there and patients are literally afraid of its generic versions - but the Bloomberg article totally ignored this aspect.

Consequently, the article also tried to put Valeant's pharmacy partner Direct Success into the "Philidor angle" which is actually quite a stretch. Direct Success is a services company that in total transparency works for many other large pharmaceutical manufacturers and Valeant is just one of its many clients. Moreover, the co-pay program Direct Success manages for Valeant is just one of the two programs available. The other one works exactly like the Novartis Diovan program described above (without asking patients to tell pharmacists that they would like to remain on the branded medication etc.):

This means that the revenue flowing through Direct Success is only a tiny percentage of all Wellbutrin revenues: under 5% or ~$16 million in 2015. It would be totally ridiculous to deem Direct Success relevant for Valeant's future. Finally, Valeant has pointed out that:

Direct Success has no incentive to maximize reimbursement for Wellbutrin XL. Approximately 60% of the scripts that Direct Success fills are cash scripts, and the remainder are commercially covered. Direct Success gets a fee per prescription and has a discount on the product, regardless of whether they get any money from insurance. (Source)

Conclusions

The co-pay subsidized sales strategy described by Bloomberg may seem or even be aggressive - yet it is just common industry practice. So are the price increases before and after patent expiration.

While Bloomberg correctly noticed that "it's unusual in the drug industry for an old brand-name drug with generic competition to enjoy the sort of sales burst that Wellbutrin XL has had", the article's authors totally failed to recognize why the case of Wellbutrin is special. As they were searching an explanation for Wellbutrin's late success, their incomplete knowledge led them to find in Direct Success something like "yet another Philidor" despite the absolutely not material sales contribution of the channel and the total transparency of Direct Success' services.

Bloomberg also questioned the insurers' awareness of drugs like Wellbutrin that supposedly "were under the radar". If the authors hadn't ignored the previous problems with generic Wellbutrin, they would have understood that insurers are likely perfectly aware of the situation. After the terrible FDA failure with generics, Wellbutrin could not be "under the radar" anymore. Insurers will understand that at least for those patients that have experienced the not equivalent generics, there are excellent reasons to stay on the branded drug - and hence they will continue to provide reimbursement - or what would you do after experiencing sudden suicidal and homicidal thoughts with a supposedly equivalent generic? I'd take the branded antidepressant forever and nothing else.

Questions

The Bloomberg article like you read it right now is not the original version. Right after it had been published, I raised a few questions on Twitter and Bloomberg's health and science editor Drew Armstrong effectively recognized that the issue of the non-equivalent generics is relevant to the Wellbutrin story because doctors simply might not believe the FDA anymore and go for the safest option right away.

Furthermore, Valeant quickly responded to the first version of the article.

The article in its current version includes part of Valeant's response - but quite surprisingly still does not reference the "scary" issues with generic Wellbutrin. I think this is highly questionable, given that without knowing about these issues it is impossible to understand Valeant's pricing power - which obviously and inevitably leads to adventurous hypothesis about an otherwise unbelievable sales increase. It remains a mystery to me why Bloomberg continues to hide such important background information from its readers. Maybe the authors understand that their whole article would become pretty pointless.

Outlook

So will Valeant continue to reap money from Wellbutrin? Will it be more or less? Will insurers limit reimbursement? - I have already answered some of these questions. Basically I believe that Wellbutrin is actually a good example of what Valeant calls "durable products". If you know enough about the history of Wellbutrin, it is easy to see why there will always be a small patient population extremely unwilling to switch to a generic. Given the availability of officially authorized generic equivalents, the company can raise prices on the branded drug without effectively limiting access.

However, the story does not end here. Or maybe yes, in the sense that the above strategy might belong to the past. Not for the reasons that short sellers and Bloomberg are alluding to - but rather because the essence of a durable product is not much different from what a moat is for a business: it protects earnings under almost any scenario.

Here is an example: With the new Walgreens' (NASDAQ:WBA) collaboration, Valeant could effectively sell Wellbutrin at low generic prices and still grow profits - while patients and insurers would effectively save money. This is because Walgreens has a market share of generic prescriptions of 15% - and if Valeant offered Wellbutrin through Walgreens for the same prices as its so-called generic equivalents, given the drug's special history, Valeant's market share would likely jump from the current 1.5% to almost ten times as much. Who would take on the "generic risk" if the branded drug was just as cheap as its unbranded copy? Furthermore, considering that generic Wellbutrin is often more expensive than Valeant's cash pay option (remember: 60% of current sales through Direct Success) and the little incremental cost of higher sales volumes, it is easy to see how Valeant could reap enormous profits from such a strategy, while still creating great benefits for patients and insurers.

Here is how Walgreens' CEO describes the collaboration:

The two main parts of the agreements combine to provide Valeant with the opportunity to serve a far wider patient base at a significantly lower cost, and the potential to both grow their business and improve convenience and service levels at an overall saving to the healthcare system. (Source)

This also answers one of the most relevant questions regarding the "new", "post-Philidor" Valeant: How will the company grow without raising prices and without acquisitions? - It can, it will.

Disclosure: I am/we are long VRX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.